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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended February 28, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-14749
Rocky Mountain Chocolate Factory, Inc.
(Exact name of registrant as specified in its charter)
Colorado 84-0910696
(State of Incorporation) (I.R.S. Employer Identification No.)
265 Turner Drive, Durango, CO 81301
(Address of principal executive offices)
(970) 259-0554
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
Common Stock, $.03 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
On May 29, 1998, there were 2,591,449 shares of Common Stock outstanding. The
aggregate market value of the Common Stock (based on the average of the closing
bid and asked prices as quoted on the NASDAQ National Market System on May 29,
1998) held by non-affiliates was $14,404,142.
Documents incorporated by reference: None
The Exhibit Index is located on page 55.
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ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
FORM 10-K
TABLE OF CONTENTS
Page No.
PART I.
Item 1 Business 3
Item 2 Properties 15
Item 3 Legal Proceedings 16
Item 4 Submission of Matters to a Vote of Security Holders 16
PART II.
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 16
Item 6 Selected Financial Data 17
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 8 Financial Statements 26
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 44
PART III.
Item 10 Directors and Executive Officers of the Registrant 44
Item 11 Executive Compensation 47
Item 12 Security Ownership of Certain Beneficial Owners and 49
Management
Item 13 Certain Relationships and Related Transactions 50
PART IV.
Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K 50
SIGNATURES 54
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PART I.
ITEM 1. BUSINESS
General
Founded in 1981 and incorporated in Colorado in 1982, Rocky Mountain Chocolate
Factory, Inc. (the "Company") is a manufacturer, international franchiser and
retail operator. The Company is headquartered in Durango, Colorado and
manufactures an extensive line of premium chocolate candies and other
confectionery products. As of April 30, 1998 there were 37 Company-owned and
185 franchised Rocky Mountain Chocolate Factory stores operating in 43 states,
Canada and Guam. Additionally, the Company recently completed a master
franchise agreement to establish a number of Rocky Mountain Chocolate Factory
stores in Taiwan.
Approximately 40% of the products sold at the Company-owned and franchised Rocky
Mountain Chocolate Factory stores are prepared on the premises. The Company
believes this in-store preparation creates a special store ambiance and the
aroma and sight of products being made attracts foot traffic and assures
customers that products are indeed fresh.
The Company believes that its principal competitive strengths lie in its name
recognition, its reputation for the quality, variety and the taste of its
products; the special ambiance of its stores; its knowledge and experience in
applying criteria for selection of new store locations; its expertise in the
manufacture of chocolate candy products and the merchandising and marketing of
chocolate and other candy products; and the control and training infrastructures
it has implemented to assure consistent customer service and execution of
successful practices and techniques at its franchised and Company-owned stores.
The Company believes its manufacturing expertise and reputation for quality has
facilitated the sale of selected product through new distribution channels. The
Company is currently testing and evaluating a number of alternative distribution
channel programs including wholesaling to major national retailers, fundraising,
corporate sales, mail order and direct response advertising.
The Company's revenues are currently derived from three principal sources: (i)
sales to franchisees and others of chocolates and other confectionery products
manufactured by the Company (43-41-44%); (ii) sales at Company-owned stores of
chocolates and other confectionery products (including product manufactured by
the Company) (44-47-42%) and (iii) the collection of initial franchise fees and
royalties from franchisees (13-12-14%). The figures in parentheses show the
percentage of total revenues attributable to each source for fiscal years ended
February 28 or 29, 1998, 1997 and 1996, respectively.
According to the National Confectionery Association the total U.S. candy market
exceeded $21.1 billion of sales in 1996. Candy sales have risen 29% since 1988,
with an average annual growth rate of between 4% and 6%, according to United
States Department of Commerce figures. According to the Department of Commerce,
per capita consumption of chocolate exceeds 11 pounds per year nationally,
generating annual
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sales of approximately $11.7 billion. Sales of chocolate products are expected
to grow at a rate of 3% to 4% annually, according to The Candy Market.
In December 1997, the Company decided its Fuzziwig's Candy Factory store segment
did not meet its strategic long-term goals, and accordingly, adopted a plan to
divest itself of these operations. The Company expects to complete the
divestiture on or about July 31, 1998. Fuzziwig's Candy Factory stores sell
hard conventional and nostalgic candies purchased from third party suppliers.
As of April 30, 1998 there were 10 Company-owned and 3 franchised Fuzziwig's
Candy Factory stores, which have been operating for periods ranging from
approximately three months to three years.
BUSINESS STRATEGY
The Company's objective is to build on its position as a leading international
franchiser, manufacturer of high quality chocolate and other confectionery
products, and operator of retail chocolate stores. The Company continually
seeks opportunities to profitably expand its business. To accomplish this
objective, the Company employs a business strategy that includes the following
elements:
Product Quality and Variety
The Company maintains the unsurpassed taste and quality of its chocolate candies
by using only the finest chocolate and other wholesome ingredients. The Company
uses its own proprietary recipes, primarily developed by its master candy maker.
A typical Rocky Mountain Chocolate Factory store offers up to 100 of the
Company's chocolate candies throughout the year and as many as 200, including
many packaged candies, during the holiday seasons. Individual stores also offer
several varieties of premium fudge and gourmet caramel apples, as well as other
products prepared in the store from Company recipes. The Company, in fiscal
1998, implemented a major program to improve factory sales through development
and sale of an expanded line of new products, including its own sugar-free line
and themed, branded and novelty chocolate candies.
Store Atmosphere and Ambiance
The Company seeks to establish an enjoyable and inviting atmosphere in each
Rocky Mountain Chocolate Factory store. Each store prepares certain products,
including fudge, brittles and caramel apples, in the store. In-store preparation
is designed both to be fun and entertaining for customers and to convey an image
of freshness and homemade quality. The special ambiance of Rocky Mountain
Chocolate Factory stores is also achieved through the use of distinctive decor
designed to give the store an attractive country Victorian look. The Company's
design staff has developed easily replicable designs and specifications to
ensure that the Rocky Mountain Chocolate Factory concept is consistently
implemented throughout the system.
Site Selection
Careful selection of a site is critical to the success of a Rocky Mountain
Chocolate Factory store. Many factors are considered by the Company in
identifying suitable sites, including tenant mix, visibility, attractiveness,
accessibility, level of foot traffic and occupancy costs. Final site selection,
for both franchised and Company-owned stores, occurs only after the Company's
senior management has approved the site. The Company believes that the
experience of its management team in evaluating a potential site is one of the
Company's competitive strengths.
Customer Service Commitment
The Company emphasizes excellence in customer service and seeks to employ and to
sell franchises to motivated and energetic people. The Company has implemented
sales incentive programs for the employees of Company-owned stores so that the
store personnel having direct contact with customers share in the success of
their stores. The Company also fosters enthusiasm for its customer service
philosophy and the Rocky Mountain Chocolate Factory concept through its annual
franchisee convention, annual regional meetings and other frequent contacts with
its franchisees and store managers.
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Increase Same Store Retail Sales at Existing Locations
The Company seeks to increase profitability of its store system through
increasing sales at existing store locations. System wide same store retail
sales have grown each year for the last 5 fiscal years, except for fiscal 1997:
1994 1.3%
1995 3.4%
1996 2.9%
1997 (0.5%)
1998 7.4%
The Company feels that same store retail sales growth can be accelerated though
store redesign to provide a more attractive and effective retail sales
environment embodying more shelf space and accessibility/visibility of products
while retaining the Rocky Mountain Chocolate Factory store ambiance and theme.
The Company believes that development and sale of superior new products, such as
its new line of sugar-free products, will also prove to be conducive to the goal
of enhanced same store retail sales growth.
Increase Same Store Pounds Purchased by Existing Locations
In fiscal 1998, the Company experienced a same store pounds purchased decline of
1.7% versus a decline of 3.6% in fiscal 1997. The Company believes the
improvement in this trend resulted from implementation in fiscal 1998 of a
program designed to reverse this decline and to increase same store pounds
purchased from the factory through new product development and introduction, new
packaging development, active promotion of new and existing products and to
assess and assure enhanced customer service.
Enhanced Operating Efficiencies
The Company seeks to improve its profitability by controlling costs and
increasing the efficiency of its operations. Efforts in the last several years
include the purchase of additional automated factory equipment, implementation
of a comprehensive MRP II forecasting, planning, scheduling and reporting system
and the closure or sale of underperforming Company-owned stores. In the spring
of calendar year 1995, the Company completed a factory expansion and expanded
its operation of a small fleet of trucks for the shipment of its products. These
measures have significantly improved the Company's ability to deliver its
products to franchised and Company-owned stores safely, quickly and
cost-effectively.
EXPANSION STRATEGY
Key elements of the Company's expansion strategy include:
Alternative Distribution Channels
In fiscal 1998, the Company began aggressively pursuing distribution of its
products outside its franchised and Company-owned store system. With limited
viable real estate available domestically for the establishment of new franchise
and Company-owned store locations the Company believes a significant portion of
its revenue growth and profitability goals will be achieved through distribution
of products to major national retail, fundraising and corporate sales
organizations.
During the fourth quarter of fiscal 1998, a major pilot program was launched
with Sam's Club. Selected Company products are offered in approximately eighty
(80) Sam's Club locations throughout the United States. The Company's products
are merchandised on high quality and attractive carts to maintain the Company's
image as a premium chocolate manufacturer.
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If the pilot is successful for the Company and Sam's Club, the Company expects
to expand distribution of its product into additional Sam's Club locations.
The Company believes that its strategy to distribute selected Rocky Mountain
Chocolate Factory products through alternative distribution channels such as
Sam's Club will build its brand awareness and customer base and ultimately
increase the Company's and its franchise partners' market share.
International Franchise Development
With the opening of a franchised store in Guam and the signing of a master
franchise agreement for Taiwan the Company has begun a planned process of
international expansion. In calendar 1998 the Company plans to deploy
additional resources towards developing a market internationally for Rocky
Mountain Chocolate Factory stores. In May 1998, the Company attended the
International Franchise Expo in Chicago, Illinois, and will attend two
additional shows in the fall of 1998. Attendance at these international events
strengthens and expands what the Company believes is a solid base of contacts in
the international franchise network. Presently the Company is in discussions
with a potential master franchisee for China and has received indications of
preliminary interest from potential European, Asian and South American
franchisees. Currently, the international agreements and activities described in
this paragraph are not material to the Company's operations or financial
position.
Army Air Force Exchange Services (AAFES)
The Company has received a commitment from AAFES to test two Company-owned Rocky
Mountain Chocolate Factory stores in two of its largest domestic bases.
Depending on the sales volume and profitability of these test stores, there may
be a unit growth opportunity in some of the approximately 160 bases both in the
United States and internationally. The Company anticipates that the two initial
test stores will be operational in mid-to-late summer of 1998.
Unit Growth for Rocky Mountain Chocolate Factory
The Company is experiencing constraints in the growth in the number of its Rocky
Mountain Chocolate Factory locations posed by a slowdown in the pace of
establishment of new factory outlet centers and availability of existing premium
locations in existing factory outlet and other environments where its concept
has proven successful. Despite such constraints, the Company is continuing to
seek locations in its traditional operating environments such as prime tourist
areas, regional malls, and mixed use and factory outlet centers. Additionally,
the Company will continue to purchase strategic premium locations from its
franchise system, as they become available, to convert to Company-owned stores.
High Traffic Environments
The Company currently establishes franchised and Company-owned stores in three
primary environments: factory outlet malls, tourist environments and regional
malls. The Company, over the last several years, has had a particular focus on
factory outlet mall locations. Although each of these environments has a number
of attractive features, including a high level of foot traffic, the factory
outlet mall environment has historically offered the best combination of tenant
mix, customer spending characteristics and favorable occupancy costs. The
Company has established a business relationship with the major outlet mall
developers in the United States and believes that these relationships provide it
with the opportunity to take advantage of attractive sites in new and existing
outlet malls.
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Name Recognition and New Market Penetration
The Company believes the visibility of its stores and the high foot traffic at
its factory outlet mall and tourist locations has generated strong name
recognition of Rocky Mountain Chocolate Factory and demand for its franchises.
The Rocky Mountain Chocolate Factory system has historically been concentrated
in the western United States and the Rocky Mountains, but recent growth has
generated a gradual easterly momentum as new Company-owned and franchised stores
have been opened in the eastern half of the country. This growth has further
increased the Company's name recognition and demand for its franchises.
Distribution of Rocky Mountain Chocolate Factory products through new channels,
such as major national retail chains, also increases name recognition and brand
awareness in areas of the country in which the Company has not previously had a
significant presence. The Company believes that by distributing selected Rocky
Mountain Chocolate Factory products through alternative distribution channels
its name recognition will improve and benefit its entire franchised and
Company-owned store systems.
STORE CONCEPT
The Company seeks to establish a fun and inviting atmosphere in its Rocky
Mountain Chocolate Factory store locations.
Unlike most other confectionery stores, each Rocky Mountain Chocolate Factory
store prepares certain products, including fudge and caramel apples, in the
store. Customers can observe store personnel make fudge from start to finish,
including the mixing of ingredients in old-fashioned copper kettles and the
cooling of the fudge on large marble tables, and are often invited to sample the
store's products. The Company believes that an average of approximately 40% of
the revenues of Company-owned and franchised stores are generated by sales of
products prepared on the premises. The Company believes the in-store preparation
and aroma of its products enhance the ambiance at Rocky Mountain Chocolate
Factory stores, are fun and entertaining for its customers and convey an image
of freshness and homemade quality.
Rocky Mountain Chocolate Factory stores have a distinctive country Victorian
decor, which further enhances their friendly and enjoyable atmosphere. Each
store includes finely-crafted wood cabinetry, copper and brass accents, etched
mirrors and large marble tables on which fudge and other products are made. To
ensure that all stores conform to the Rocky Mountain Chocolate Factory image,
the Company's design staff provides working drawings and specifications and
approves the construction plans for each new franchised or Company-owned store.
The Company also controls the signage and building materials that may be used in
the stores.
The average store size is approximately 1,000 square feet, approximately 650
square feet of which is selling space. Most stores are open seven days a week.
Typical hours are 10 a.m. to 9 p.m., Monday through Saturday, and 12 noon to 6
p.m. on Sundays. Store hours in tourist areas may vary depending upon the
tourist season.
PRODUCTS AND PACKAGING
The Company typically produces approximately 250 chocolate candies and other
confectionery products, using proprietary recipes developed primarily by the
Company's master candy maker. These products include many varieties of clusters,
caramels, creams, mints and truffles. The Company continues to engage in a
major effort to expand its product line by developing additional exciting and
attractive new products. During the Christmas, Easter and Valentine's Day
holiday seasons, the Company may make as many as 200 additional items, including
many candies offered in packages specially designed for the holidays. A typical
Rocky Mountain Chocolate Factory store offers up
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to 100 of these candies throughout the year and up to 200 during holiday
seasons. Individual stores also offer more than 15 premium fudges and other
products prepared in the store. The Company believes that approximately 50% of
the revenues of Rocky Mountain Chocolate Factory stores are generated by
products manufactured at the Company's factory, 40% by products made in the
store using Company recipes and ingredients purchased from the Company or
approved suppliers and the remaining 10% by products, such as ice cream, soft
drinks and other sundries, purchased from approved suppliers.
The Company uses only the finest chocolates, nut meats and other wholesome
ingredients in its candies. In February 1995 the Company's Valentine's Day
gift-boxed chocolates were awarded MONEY MAGAZINE's top rating and were
described as having "superior flavor" which is "intense" and "natural." The
Company continually strives to offer new confectionery products in order to
maintain the excitement and appeal of its products.
Chocolate candies manufactured by the Company are sold at Company-owned and
franchised stores at prices ranging from $12.90 to $14.90 per pound, with an
average price of $13.50 per pound. Franchisees set their own retail prices,
though the Company does recommend prices for all its products.
The Company's in-house graphics designers create packaging that reflects the
country Victorian theme of its stores. The Company develops special packaging
for the Christmas, Valentine's Day and Easter holidays, and customers can have
their purchases packaged in decorative boxes and fancy tins throughout the year.
The Company's new packaging for its Rocky Mountain Mints in 1995 received the
AWARD OF EXCELLENCE from the National Paperbox Association.
OPERATING ENVIRONMENT
The Company currently establishes franchised and Company-owned Rocky Mountain
Chocolate Factory stores in three primary environments: factory outlet malls,
tourist areas and regional malls. Each of these environments has a number of
attractive features, including high levels of foot traffic.
Factory Outlet Malls
There are approximately 330 factory outlet malls in the United States, and as of
February 28, 1998, there were Rocky Mountain Chocolate Factory stores in 110 of
these malls in 43 states. The Company has established business relationships
with the major outlet mall developers in the United States. Although not all
factory outlet malls provide desirable locations for the Company's stores,
management believes the Company's relationships with these developers will
provide it with the opportunity to take advantage of attractive sites in new and
existing outlet malls.
Tourist Areas
As of February 28, 1998, there were approximately 55 Rocky Mountain Chocolate
Factory stores in franchised locations considered to be tourist areas, including
Aspen, Colorado; Fisherman's Wharf in San Francisco, California; and the
Riverwalk in San Antonio, Texas. Tourist areas are very attractive locations
because they offer high levels of foot traffic and favorable customer spending
characteristics, and greatly increase the Company's visibility and name
recognition. The Company believes there are significant opportunities to expand
into additional tourist areas with high levels of foot traffic.
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Regional Malls
There are approximately 2,500 regional malls in the United States, and as of
February 28, 1998, there were Rocky Mountain Chocolate Factory stores in
approximately 33 of these, including the franchised locations in the Mall of
America in Bloomington, Minnesota; Escondido, California; Fort Collins,
Colorado; and West Palm Beach, Florida. Although often providing favorable
levels of foot traffic, regional malls typically involve more expensive rent
structures and more competing food and beverage concepts.
The Company believes there are a number of other environments that have the
characteristics necessary for the successful operation of Rocky Mountain
Chocolate Factory stores such as airports and sports arenas. Three franchised
Rocky Mountain Chocolate Factory stores exist at airport locations: two at
Denver International Airport and one at Vancouver International Airport in
Canada. As described above, the Company has also recently begun aggressively
pursuing the distribution of its products through alternative distribution
channels such as major national retail, fundraising and corporate sales
organizations.
FRANCHISING PROGRAM
General
The Company's franchising philosophy is one of service and commitment to its
franchise system, and it continuously seeks to improve its franchise support
services. The Company's concept has consistently been rated as an outstanding
franchise opportunity by publications and organizations rating such
opportunities. In February 1995, Rocky Mountain Chocolate Factory was rated
seventh in SUCCESS MAGAZINE's "Franchise Gold 100" most desirable franchises. As
of April 30, 1998, there were 185 franchised stores in the Rocky Mountain
Chocolate Factory system.
Franchisee Sourcing and Selection
The majority of new franchises are awarded to persons referred by existing
franchisees, to interested consumers who have visited Rocky Mountain Chocolate
Factory stores and to existing franchisees. The Company also advertises for new
franchisees in national and regional newspapers as suitable potential store
locations come to the Company's attention. Franchisees are approved by the
Company on the basis of the applicant's net worth and liquidity, together with
an assessment of work ethic and personality compatibility with the Company's
operating philosophy.
In fiscal 1992, the Company entered into a franchise development agreement
covering Canada with Immaculate Confections, Ltd. of Vancouver, British
Columbia. Pursuant to this agreement, Immaculate Confections purchased the
exclusive right to franchise and operate Rocky Mountain Chocolate Factory stores
in Canada. Immaculate Confections, as of April 30, 1998, operated 19 stores
under the agreement.
Training and Support
Each domestic franchisee owner/operator and each store manager for a domestic
franchisee is required to complete a 7-day comprehensive training program in
store operations and management. The Company has established a training center
at its Durango headquarters in the form of a full-sized replica of a properly
configured and merchandised Rocky Mountain Chocolate Factory store. Topics
covered in the training course include the Company's philosophy of store
operation and management, customer service, merchandising, pricing, cooking,
inventory and cost control, quality standards, record keeping, labor scheduling
and personnel management. Training is
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based on standard operating policies and procedures contained in an operations
manual provided to all franchisees, which the franchisee is required to follow
by terms of the franchise agreement. Additionally, and importantly, trainees are
provided with a complete orientation to Company operations by working in key
factory operational areas and by meeting with each member of the senior
management of the Company. Training continues through the opening of the store,
where Company field consultants assist and guide the franchisee in all areas of
operation.
The Company's operating objectives include providing Company knowledge and
expertise in merchandising, marketing and customer service to all front-line
store level employees to maximize their skills and ensure that they are fully
versed in the Company's proven techniques.
The Company provides ongoing support to franchisees through its field
consultants, who maintain regular and frequent communication with the stores by
phone and by site visits. The field consultants also review and discuss with the
franchisee store operating results and provide advice and guidance in improving
store profitability and in developing and executing store marketing and
merchandising programs. The Company has developed a handbook containing a
"pre-packaged" local store marketing plan, which allows franchisees to implement
cost-effective promotional programs that have proven successful in other Rocky
Mountain Chocolate Factory stores.
Regional conferences are held each fall with a focus on holiday merchandising
techniques in preparation for the fall and Christmas holidays. "Town Meetings"
are held each March with the goal of furthering communication and obtaining
franchisee feedback in anticipation of the Company's annual Franchisee
Convention. The Company holds its annual convention each May, at which seminars
and workshops are presented on subjects considered vital to continuing
improvement in operating results of Rocky Mountain Chocolate Factory stores.
Quality Standards and Control
The franchise agreement for Rocky Mountain Chocolate Factory franchisees
requires franchisees to comply with the Company's procedures of operation and
food quality specifications and to permit audits and inspections by the Company.
Operating standards for Rocky Mountain Chocolate Factory stores are set forth in
operating manuals. These manuals cover general operations, factory ordering,
merchandising, advertising and accounting procedures. Through their regular
visits to franchised stores, Company field consultants audit performance and
adherence to Company standards. The Company has the right to terminate any
franchise agreement for non-compliance with the Company's operating standards.
Products sold at the stores and ingredients used in the preparation of products
approved for on-site preparation must be purchased from the Company or from
approved suppliers.
The Franchise Agreement: Terms and Conditions
The domestic offer and sale of Rocky Mountain Chocolate Factory franchises is
made pursuant to the Uniform Franchise Offering Circular prepared in accordance
with federal and state laws and regulations. States that regulate the sale and
operation of franchises require a franchiser to register or file certain notices
with the state authorities prior to offering and selling franchises in those
states.
Under the current form of domestic Rocky Mountain Chocolate Factory franchise
agreement, franchisees pay the Company (i) an initial franchise fee of $19,500
for each store, (ii) royalties equal to 5% of monthly gross sales, and (iii) a
marketing fee equal to 1% of monthly gross sales. Franchisees are generally
granted exclusive
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territory with respect to the operation of Rocky Mountain Chocolate Factory
stores only in the immediate vicinity of their stores. Chocolate products not
made on the premises by franchisees must be purchased from the Company or
approved suppliers.
The franchise agreements require franchisees to comply with the Company's
procedures of operation and food quality specifications, to permit inspections
and audits by the Company and to remodel stores to conform with standards in
effect. The Company may terminate the franchise agreement upon the failure of
the franchisee to comply with the conditions of the agreement and upon the
occurrence of certain events, such as insolvency or bankruptcy of the franchisee
or the commission by the franchisee of any unlawful or deceptive practice, which
in the judgment of the Company is likely to adversely affect the Rocky Mountain
Chocolate Factory system. The Company's ability to terminate franchise
agreements pursuant to such provisions is subject to applicable bankruptcy and
state laws and regulations. See "Business - Regulation."
The agreements prohibit the transfer or assignment of any interest in a
franchise without the prior written consent of the Company. The agreements also
give the Company a right of first refusal to purchase any interest in a
franchise if a proposed transfer would result in a change of control of that
franchise. The refusal right, if exercised, would allow the Company to purchase
the interest proposed to be transferred under the same terms and conditions and
for the same price as offered by the proposed transferee.
The term of each Rocky Mountain Chocolate Factory franchise agreement is five
years, and franchisees have the right to renew for two successive five-year
terms.
Franchise Financing
The Company does not provide prospective franchisees with financing for their
stores, but has developed relationships with two national sources of franchisee
financing to whom it will refer franchisees. Typically, franchisees have
obtained their own sources of such financing and have not required the Company's
assistance.
COMPANY STORE PROGRAM
As of April 30, 1998, there were 37 Company-owned Rocky Mountain Chocolate
Factory stores. Company-owned stores provide a training ground for
Company-owned store personnel and district managers and a controllable testing
ground for new products and promotions, operating and training methods and
merchandising techniques. In many cases, the Company has been able to take
advantage of a promising new location by establishing a Company-owned store when
a delay in finding a qualified franchisee might have jeopardized the Company's
ability to secure the site.
Managers of Company-owned stores are required to comply with all Company
operating standards and undergo training and receive support from the Company
similar to the training and support provided to franchisees. See "Franchising
Program-Training and Support" and "Franchising Program-Quality Standards and
Control."
Additionally, the Company will continue to purchase strategic premium locations
from its franchise system, as they become available, to convert to Company-owned
stores.
MANUFACTURING OPERATIONS
General
The Company manufactures its chocolate candies at its factory in Durango,
Colorado. All products are produced consistent with the Company's philosophy of
using only the
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finest, highest quality ingredients with no artificial preservatives to achieve
its marketing motto of "the peak of perfection in handmade chocolates."
It has always been the belief of management that the Company should control the
manufacturing of its own chocolate products. By controlling manufacturing, the
Company can better maintain its high product quality standards, offer unique,
proprietary products, manage costs, control production and shipment schedules
and potentially pursue new or under-utilized distribution channels.
Manufacturing Processes
The manufacturing process primarily involves cooking or preparing candy centers,
including nuts, caramel, peanut butter, creams and jellies, and then coating
them with chocolate or other toppings. All of these processes are conducted in
carefully controlled temperature ranges, and the Company employs strict quality
control procedures at every stage of the manufacturing process. The Company uses
a combination of manual and automated processes at its factory. Although the
Company believes that it is currently preferable to perform certain
manufacturing processes, such as dipping of some large pieces, by hand,
automation increases the speed and efficiency of the manufacturing process. The
Company has from time to time automated processes formerly performed by hand
where it has become cost-effective for the Company to do so without compromising
product quality or appearance.
The Company seeks to ensure the freshness of products sold in Rocky Mountain
Chocolate Factory stores with frequent shipments and production schedules that
are closely coordinated with projected and actual orders. Most Rocky Mountain
Chocolate Factory stores do not have significant space for the storage of
inventory, and the Company encourages franchisees and store managers to order
only the quantities that they can reasonably expect to sell within approximately
two to four weeks. For these reasons, the Company generally does not have a
significant backlog of orders.
Ingredients
The principal ingredients used by the Company are chocolate, nuts, sugar, corn
syrup, peanut butter, cream and butter. The factory receives shipments of
ingredients daily. To ensure the consistency of its products, the Company buys
ingredients from a limited number of reliable suppliers. In order to assure a
continuous supply of chocolate and certain nuts, the Company frequently enters
into purchase contracts for these products having durations of six to 18 months.
Because prices for these products may fluctuate, the Company may benefit if
prices rise during the terms of these contracts, but it may be required to pay
above-market prices if prices fall. The Company has one or more alternative
sources for all essential ingredients and therefore believes that the loss of
any supplier would not have a material adverse effect on the Company and its
results of operations. The Company currently also purchases small amounts of
finished candy from third parties on a private label basis for sale in Rocky
Mountain Chocolate Factory stores.
Factory and Trucking Operations
The Company in fiscal 1996 expanded its factory from 27,000 square feet to
53,000 square feet, which provided space for additional automated equipment and
for warehousing of ingredients and finished candies prior to shipment. Beginning
in fiscal 1994, the Company also began operating several trucks and now ships a
substantial
12
<PAGE>
portion of its products from the factory on its fleet of trucks. The Company's
trucking operations and factory expansion have significantly improved the
Company's ability to deliver its products to the stores quickly and
cost-effectively. In addition, the Company back-hauls its own ingredients and
supplies, as well as product from third parties, on return trips as a basis for
increasing trucking program economics.
In January 1998, the Company acquired a two acre parcel adjacent to its factory
to ensure the availability of adequate space to expand the factory as volume
demands.
MARKETING
The Company relies primarily on in-store promotion and point-of-purchase
materials to promote the sale of its products. The monthly marketing fees
collected from franchisees are used by the Company to develop new packaging and
in-store promotion and point-of-purchase materials, and to create and update the
Company's local store marketing handbooks.
The Company focuses on local store marketing efforts by providing customizable
marketing materials, including advertisements, coupons, flyers and mail order
catalogs generated by its in-house Creative Services department. The department
works directly with franchisees to implement local store marketing programs.
The Company aggressively seeks low cost, high return publicity opportunities
through its in-house public relations staff by participating in local and
regional events, sponsorships and charitable causes. The Company has not
historically and does not intend to engage in national advertising in the near
future.
COMPETITION
The retailing of confectionery products is highly competitive. The Company and
its franchisees compete with numerous businesses that offer confectionery
products. Many of these competitors have greater name recognition and financial,
marketing and other resources than the Company. In addition, there is intense
competition among retailers for real estate sites, store personnel and qualified
franchisees. Competitive market conditions could adversely affect the Company
and its results of operations and its ability to expand successfully.
The Company believes that its principal competitive strengths lie in its name
recognition and its reputation for the quality, value, variety and taste of its
products and the special ambiance of its stores; its knowledge and experience in
applying criteria for selection of new store locations; its expertise in
merchandising and marketing of chocolate and other candy products; and the
control and training infrastructures it has implemented to assure execution of
successful practices and techniques at its franchised and Company-owned store
locations. In addition, by controlling the manufacturing of its own chocolate
products, the Company can better maintain its high product quality standards for
those products, offer proprietary products, manage costs, control production and
shipment schedules and pursue new or under-utilized distribution channels.
TRADE NAME AND TRADEMARKS
The trade name "Rocky Mountain Chocolate Factory," the phrases "The Peak of
Perfection in Handmade Chocolates" and "America's Chocolatier", as well as all
other trademarks, service marks, symbols, slogans, emblems, logos and designs
used in the Rocky Mountain Chocolate Factory system, are proprietary rights of
the Company. All of the foregoing are believed to be of material importance to
the Company's business. The registration
13
<PAGE>
for the trademark Rocky Mountain Chocolate Factory has been granted in the
United States and Canada. Applications have been filed to register the Rocky
Mountain Chocolate Factory trademark in certain foreign countries.
The Company has not attempted to obtain patent protection for the proprietary
recipes developed by the Company's master candy-maker and is relying upon its
ability to maintain the confidentiality of those recipes.
EMPLOYEES
At April 30, 1998, the Company employed 361 persons. Most employees, with the
exception of store, factory and corporate management, are paid on an hourly
basis. The Company also employs some people on a temporary basis during peak
periods of store and factory operations. The Company seeks to assure that
participatory management processes, mutual respect and professionalism and high
performance expectations for the employee exist throughout the organization.
The Company believes that it provides working conditions, wages and benefits
that compare favorably with those of its competitors. The Company's employees
are not covered by a collective bargaining agreement. The Company considers its
employee relations to be good.
SEASONAL FACTORS
The Company's sales and earnings are seasonal, with significantly higher sales
and earnings occurring during the Christmas holiday and summer vacation seasons
than at other times of the year, which causes fluctuations in the Company's
quarterly results of operations. In addition, quarterly results have been, and
in the future are likely to be, affected by the timing of new store openings and
the sale of franchises. Because of the seasonality of the Company's business and
the impact of new store openings and sales of franchises, results for any
quarter are not necessarily indicative of the results that may be achieved in
other quarters or for a full fiscal year.
REGULATION
Each of the Company-owned and franchised stores is subject to licensing and
regulation by the health, sanitation, safety, building and fire agencies in the
state or municipality where located. Difficulties or failures in obtaining the
required licensing or approvals could delay or prevent the opening of new
stores. New stores must also comply with landlord and developer criteria.
Many states have laws regulating franchise operations, including registration
and disclosure requirements in the offer and sale of franchises. The Company is
also subject to the Federal Trade Commission regulations relating to disclosure
requirements in the sale of franchises and ongoing disclosure obligations.
Additionally, certain states have enacted and others may enact laws and
regulations governing the termination or non-renewal of franchises and other
aspects of the franchise relationship that are intended to protect franchisees.
Although these laws and regulations, and related court decisions may limit the
Company's ability to terminate franchises and alter franchise agreements, the
Company does not believe that such laws or decisions will have a material
adverse effect on its franchise operations. However, the laws applicable to
franchise operations and relationships continue to develop, and the Company is
unable to predict the effect on its intended operations of additional
requirements or restrictions that may be enacted or of court decisions that may
be adverse to franchisers.
14
<PAGE>
Federal and state environmental regulations have not had a material impact on
the Company's operations but more stringent and varied requirements of local
governmental bodies with respect to zoning, land use and environmental factors
could delay construction of new stores.
Companies engaged in the manufacturing, packaging and distribution of food
products are subject to extensive regulation by various governmental agencies. A
finding of a failure to comply with one or more regulations could result in the
imposition of sanctions, including the closing of all or a portion of the
Company's facilities for an indeterminate period of time.
The Nutrition Labeling and Education Act of 1990 became effective May 8, 1994.
Pursuant to the Act, the Company filed a "Small Business Food Labeling Exemption
Notice" with the U.S. Food and Drug Administration, which provides a phased
timeline for implementing labeling compliant with the Act. The Company is
currently implementing product labeling in fulfillment of the Act within the
timeline allowed under its Small Business exemption.
The Company provides a limited amount of trucking services to third parties, to
fill available space on the Company's trucks. The Company's trucking operations
are subject to various federal and state regulations, including regulations of
the Federal Highway Administration and other federal and state agencies
applicable to motor carriers, safety requirements of the Department of
Transportation relating to interstate transportation and federal, state and
Canadian provincial regulations governing matters such as vehicle weight and
dimensions.
The Company believes it is operating in substantial compliance with all
applicable laws and regulations.
ITEM 2. PROPERTIES
The Company's manufacturing operations and corporate headquarters are located at
its 53,000 square foot manufacturing facility, which it owns, in Durango,
Colorado. During fiscal 1998, the Company's factory produced approximately 2.0
million pounds of chocolate candies, up from 1.7 million pounds in fiscal 1997.
The factory has the capacity to produce approximately 3.5 million pounds per
year. In January 1998, the Company acquired a two acre parcel adjacent to its
factory to ensure the availability of adequate space to expand the factory as
volume demands.
As of April 30, 1998, all 37 Company-owned stores were occupied pursuant to
non-cancelable leases of five to ten years having varying expiration dates, most
of which contain optional five-year renewal rights. The Company does not deem
any individual store lease to be significant in relation to its overall
operations.
The Company acts as primary lessee of some franchised store premises, which it
then subleases to franchisees, but the majority of existing locations are leased
by the franchisee directly. Current Company policy is not to act as primary
lessee on any further franchised locations. At April 30, 1998, the Company was
the primary lessee at 50 of its 185 franchised stores. The subleases for such
stores are on the same terms as the Company's leases of the premises. For
information as to the amount of the Company's rental obligations under leases on
both Company-owned and franchised stores, see Note 6 of Notes to financial
statements.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceedings that are material
to the Company's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of fiscal 1998.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION
The Company's Common Stock trades on the National Market System of The NASDAQ
Stock Market under the trading symbol "RMCF".
On May 18, 1998 the Company purchased 336,000 shares of its common stock at
$5.15 per share in a private transaction and on January 17, 1996 the Company
purchased on the open market 125,000 shares of its Common Stock at $8.09 per
share. The Company made these purchases because the Company felt that its
Common Stock was undervalued and that such purchases would therefore be in the
best interest of the Company and its stockholders.
The table below sets forth high and low bid information for the Common Stock as
quoted on NASDAQ for each quarter of fiscal years 1998 and 1997. The quotations
reflect inter-dealer prices, without retail mark-up, mark-down, or commission
and may not necessarily represent actual transactions.
FISCAL YEAR ENDED FEBRUARY 28, 1998
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
First Quarter $ 5.125 $ 2.750
Second Quarter 5.250 4.000
Third Quarter 7.125 4.250
Fourth Quarter 6.594 4.500
FISCAL YEAR ENDED FEBRUARY 28, 1997
HIGH LOW
First Quarter $ 8.250 $ 7.000
Second Quarter 10.875 7.500
Third Quarter 7.750 5.750
Fourth Quarter 6.750 4.375
</TABLE>
On May 29, 1998 the closing bid price for the Common Stock as reported on the
NASDAQ Stock Market was $6.375.
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<PAGE>
(b) HOLDERS
On May 29, 1998 there were approximately 405 record holders of the Company's
Common Stock. The Company believes that there are more than 1,620 beneficial
owners of its Common Stock.
(c) DIVIDENDS
The Company has not paid cash dividends on its Common Stock since its inception
and does not intend to pay cash dividends for the foreseeable future. Any
future earnings will be retained for use in the Company's business.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the fiscal years ended
February 28 or 29, 1994 through 1998, are derived from the Financial Statements
of the Company, which have been audited by Grant Thornton LLP, independent
auditors. The selected financial data should be read in conjunction with the
Financial Statements and related Notes thereto included elsewhere in this Report
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 28 OR 29,
SELECTED STATEMENT OF
OPERATIONS DATA 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Total revenues $ 9,361 $ 13,616 $ 18,552 $ 22,281 $ 23,764
Operating income (loss) 1,251 2,270 2,157 (1,026) 2,599
Income (loss) from
continuing operations 862 1,350 1,207 (1,010) 1,260
Income (loss) from
discontinued operations
(net of income taxes) - - 1 (356) (1,020)
Net income (loss) $ 862 $ 1,350 $ 1,208 $ (1,366) $ 240
BASIC EARNINGS (LOSS) PER
COMMON SHARE
Continuing Operations $ .44 $ .53 $ .43 $ (.35) $ .43
Discontinued Operations - - - (.12) (.35)
Net Income (loss) $ .44 $ .53 $ .43 $ (.47) $ .08
DILUTED EARNINGS (LOSS) PER
COMMON SHARE
Continuing Operations $ .33 $ .50 $ .42 $ (.35) $ .43
Discontinued Operations - - - (.12) (.35)
Net Income (loss) $ .33 $ .50 $ .42 $ (.47) $ .08
Weighted average common
shares outstanding 1,739 2,515 2,797 2,908 2,913
Weighted average common
shares outstanding,
assuming dilution 2,500 2,718 2,887 2,908 2,930
SELECTED BALANCE SHEET DATA
Working capital $ 1,889 $ 1,627 $ 2,043 $ 2,664 $ 3,949
Total assets 6,024 10,181 16,308 18,666 19,868
Long-term debt 604 2,314 2,184 5,737 5,993
Stockholders' equity 4,143 5,907 11,117 9,779 10,019
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results of
operations of the Company should be read in conjunction with the audited
financial statements and related Notes of the Company included elsewhere in this
report. This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Annual Report on Form 10-K contain
forward-looking statements that involve risks and uncertainties.
The Company's ability to successfully achieve expansion of its Rocky Mountain
Chocolate Factory franchise system depends on many factors not within the
Company's control including the availability of suitable sites for new store
establishment and the availability of qualified franchisees to support such
expansion.
Efforts to reverse the decline in same store pounds purchased from the factory
by franchised stores and to increase total factory sales depends on many factors
not within the Company's control including the receptivity of its franchise
system and of customers in potential new distribution channels of its product
introductions and promotional programs.
As a result, the actual results realized by the Company could differ materially
from the results discussed in or contemplated by the forward-looking statements
made herein. Words or phrases such as "will," "anticipate," "expect,"
"believe," "intend," "estimate," "project," "plan" or similar expressions are
intended to identify forward-looking statements. Readers are cautioned not to
place undue reliance on the forward-looking statements in this Annual Report on
Form 10-K.
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
Continuing Operations Results Summary
The Company posted record revenues and operating income. Revenues rose 6.7%
from 1997 to 1998, operating income increased $3.6 million from a loss of
$1.0 million in 1997 to $2.6 million in 1998 and income from continuing
operations increased $2.3 million from a loss of $1.0 million in 1997 to
income of $1.3 million in 1998. Diluted earnings per share from continuing
operations increased from a loss of $.35 per share in 1997 to income of $.43
per share in 1998.
<TABLE>
<CAPTION>
Revenues
($'s in thousands) 1998 1997 Change % Change
<S> <C> <C> <C> <C>
Factory Sales $ 10,198.6 $ 9,188.2 $ 1,010.4 11.0%
Retail Sales 10,460.5 10,494.4 (33.9) (.3%)
Royalty and Marketing Fees 2,747.6 2,342.4 405.2 17.3%
Franchise Fees 357.3 255.6 101.7 39.8%
Total $ 23,764.0 $ 22,280.6 $ 1,483.4 6.7%
</TABLE>
Factory Sales
Factory sales increased $1.0 million or 11% to $10.2 million in fiscal 1998,
compared to $9.2 million in 1997. This increase was due to: (1) an increase in
the number of franchised stores from 170 as of February 28, 1997 to 183 as of
February 28, 1998;
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<PAGE>
(2) the commencement in fiscal 1998 of wholesale sales of product to
alternative distribution channels and (3) a 2.6% price increase in April of
1997. Same store pounds purchased from the factory by franchised stores
declined 2.2% in fiscal 1998 versus fiscal 1997 partially offsetting the above
increases. The Company believes the decline in same store pounds purchased from
the factory resulted primarily from increased retail sales of store-made product
and product purchased from authorized vendors relative to factory-made products.
Same store pounds purchased is a comparison of pounds purchased from the factory
by franchised stores open for 12 months in each fiscal year.
In response to the trend of decreasing same store pounds purchased from the
factory and the limited number of suitable locations available for new
Company-owned and franchised stores, the Company is focusing on developing
alternative distribution channels, and new product introductions that replace
products from authorized outside vendors, to continue and accelerate its
improving factory sales trends.
Retail Sales
Retail sales decreased $34,000 or 0.3% to $10.46 million in fiscal 1998,
compared to $10.49 million in fiscal 1997. This decrease resulted primarily
from the closure and sale of certain under-performing stores in fiscal 1998 and
was substantially offset by an increase of 7.1% in comparable store retail sales
in 1998 versus fiscal 1997.
During fiscal 1998 the Company sold 7 and closed 6 Company-owned stores. During
fiscal 1999 the Company plans to continue selective unit growth for its retail
store system focusing on developing its retail management infrastructure and
building on the substantial increase in profitability realized in fiscal 1998
versus fiscal 1997.
Additionally, the Company will continue to purchase strategic premium locations
from its franchise system, as they become available, to convert to Company-owned
stores.
Royalties, Marketing Fees and Franchise Fees
Royalties and marketing fees increased $405,000 or 17.3% to $2.7 million in
fiscal 1998, compared to $2.3 million in fiscal 1997. This increase resulted
from an increase in the number of franchised stores operating to 183 in fiscal
1998 compared to 170 in fiscal 1997 and an increase in same store sales at
franchised stores of 7.4%. Franchise fee revenues increased $102,000 in fiscal
1998 compared to fiscal 1997 due to an increase in the number of new franchises
sold.
The Company is currently experiencing a constraint in the number of viable new
locations available for establishment of its Rocky Mountain Chocolate Factory
stores due to a lack of quality locations in environments where the concept has
proven successful.
The Company is currently examining alternatives to stand-alone Rocky Mountain
Chocolate Factory stores to further penetrate established operating environments
and venues that have yet to be exploited.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales decreased to 53.1% in fiscal 1998 versus
56.0% in fiscal 1997. This improvement resulted from increased margins on both
factory and retail sales. Company-owned store margins for fiscal 1998 improved
to 63.0% in fiscal 1998 from 60.4% in fiscal 1997 as a result of an increase in
retail prices, a focus on
19
<PAGE>
higher margin products and reduced inventory shrinkage. Factory margins
improved to 30.5% in fiscal 1998 from 25.4% in fiscal 1997 as a result of
improved manufacturing efficiencies and a 2.6% price increase in April of 1997.
The Company continues to seek improvement in factory margins through further
automation to reduce cost and to improve factory sales and production volumes
through its programs to improve same store pounds purchased and sale of products
to alternative distribution channels.
Franchise Costs
Franchise costs decreased $152,000 or 12.1% in fiscal 1998 compared to fiscal
1997. As a percentage of total royalty and marketing fees and franchise fee
revenue, franchise costs decreased to 35.6% in fiscal 1998 from 48.4% in fiscal
1997. This decrease is due primarily to reductions in design and construction
staffing.
Sales & Marketing
Sales and Marketing increased 74% to $1.3 million in fiscal 1998 from $742,000
in fiscal 1997. This increase is due to: (1) expansion of the Company's sales
and marketing group to support a larger base of franchised and Company-owned
stores; (2) expansion of promotional programs and marketing materials available
to franchised and Company-owned stores; (3) establishment of a sales force
focused on alternative distribution opportunities; and (4) enhanced customer
service and new product marketing programs.
General and Administrative
General and administrative expenses decreased 11.7% from $2.0 million in fiscal
1997 to $1.8 million in fiscal 1998, primarily as a result of reduced bad debt
expense. As a percentage of total revenues, general and administrative expense
declined from 9% in fiscal 1997 to 7.4% in fiscal 1998.
Retail Operating Expenses
Retail operating expenses decreased from $6.5 million in fiscal 1997 to $6.0
million in fiscal 1998; a decrease of 6.4%. This decrease resulted from closing
and selling certain under-performing Company-owned stores. As a result of this
decrease and the improvement in same store retail sales, retail operating
expenses, as a percentage of retail sales, decreased from 61.5% in fiscal 1997
to 57.8% in fiscal 1998.
Provision for Store Closures, Impairment Loss and Loss on Write-down of Assets
In fiscal 1997, a non-recurring restructuring charge of $1.8 million was
recorded representing the loss expected to result from the sale or closure of
certain Company-owned stores and from write-down of certain other store assets
considered impaired under provisions of Financial Accounting Standard (FAS) 121
"Accounting for the Impairment of Long-Lived Assets."
As a result of the Company's restructuring efforts, the Company's retail
operations achieved what the Company deems to be an acceptable level of
profitability in fiscal 1998.
Other Expense
Other expense of $550,000 incurred in fiscal 1998 decreased 8.2% from the
$599,000 incurred in fiscal 1997. This decrease resulted from a non-recurring
litigation
20
<PAGE>
settlement charge of $154,000 in fiscal 1997 for early lease terminations on
certain Company-owned stores, and increased interest income on excess cash
balances in fiscal 1998, offset by increased interest expense related to
borrowings in support of the Company's fiscal 1996 and 1997 Company-owned store
expansion.
Income Tax Expense
The Company's effective income tax rate in fiscal 1997 was 37.9% in comparison
with the 38.5% in 1998. The increase resulted from utilization of remaining
available state net operating loss carryforwards in fiscal 1997.
Discontinued Operations
In December 1997, the Company decided its Fuzziwig's Candy Factory Store
("Fuzziwig's") segment did not meet its long-term strategic goals, and
accordingly, adopted a plan to discontinue its operations. On June 5, 1998, the
Company entered into a definitive agreement to sell substantially all the assets
of its Fuzziwig's segment for $1.6 million. The Company expects this
transaction to close on or about July 31, 1998.
The estimated loss on disposition of Fuzziwig's of $929,000 (inclusive of
estimated losses during the phase out period of $250,000), net of applicable
income tax benefit of $587,000, has been recorded in the accompanying statement
of operations for the year ending February 28, 1998.
The operating results of Fuzziwig's, including provisions for estimated
disposition costs, lease termination costs and operating losses during the
phase-out period totaling $1.5 million have been segregated from continuing
operations and reported as separate line items net of applicable income taxes in
the statements of operations for all periods reported.
Loss from discontinued operations was $.35 per diluted share in fiscal 1998
versus $.12 in fiscal 1997.
Net Income
Net Income including discontinued operations was $.08 per diluted share in
fiscal 1998 versus a loss of $.47 per diluted share in fiscal 1997.
FISCAL 1997 COMPARED TO 1996
Continuing Operations Results Summary
The Company reported an increase in revenues of 20.1% and a loss from continuing
operations of $1.0 million for fiscal 1997 compared with income from continuing
operations of $1.2 million for fiscal 1996; a decrease of $2.2 million.
Primary causes for this shortfall in operating results were a non-recurring
restructuring charge of $1.8 million, representing the loss expected to result
from the sale or closure of certain Company-owned stores, write-down of certain
other store assets considered impaired, Company-owned store losses resulting
primarily from stores to be closed, lack of new locations for unit growth
adversely impacting franchise fee revenues and decreased same store pounds
purchased from the factory.
21
<PAGE>
Revenues
Revenue results by revenue component for fiscal 1997 in comparison with fiscal
1996 are as follows ($000):
<TABLE>
<CAPTION>
($'s in thousands) 1997 1996 Change % Change
<S> <C> <C> <C> <C>
Factory Sales $ 9,188.2 $ 8,156.5 $ 1,031.7 12.6%
Royalty and Marketing Fees 2,342.4 2,034.0 308.4 15.2%
Franchise Fees 255.6 614.3 (358.7) (58.4%)
Retail Sales 10,494.4 7,747.3 2,747.1 35.5%
Total $22,280.6 $18,552.1 $ 3,728.5 20.1%
</TABLE>
Factory Sales
Significantly increased factory sales resulted primarily from the larger number
of franchised Rocky Mountain Chocolate Factory stores in existence throughout
the year (170 Rocky Mountain Chocolate Factory stores franchised at February 28,
1997 in comparison with 150 at February 29, 1996) as augmented by the impact of
an approximate 2.6% price increase effected in January 1996. Same store pounds
purchased declined by 3.6% in fiscal 1997, partially offsetting the impact of
the increased number of stores and the price increase.
Royalties, Marketing Fees and Franchise Fees
Increased royalty and marketing fees resulted from the impact of a larger number
of franchised stores in existence throughout the year. Same store sales at
franchised stores were approximately the same as in fiscal 1996. The Company
sold 19 new franchise locations in fiscal 1997 in comparison with 41 in fiscal
1996 resulting in the decreased franchise fee revenue shown above.
Retail Sales
Retail sales of Company-owned stores increased as a result of a larger number of
Company stores in existence throughout the year (45 stores existed at February
28, 1997, in comparison with 40 in existence at February 29, 1996) in fiscal
1997 in comparison with the prior fiscal year as partially offset by the impact
of a same store retail sales decline of 2.7%. The decline in same store sales
is believed to result from the effect of lower foot traffic in the factory
outlet mall environment in which most Company-owned stores operate, and as a
result of a decline in revenues in the second year of operation from grand
opening levels of revenue at stores established in the last fiscal year at new
factory outlet malls.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of sales increased to 56.0% in fiscal 1997 versus
54.8% in fiscal 1996. This deterioration resulted from decreased margins on
both factory and retail sales. Company-owned store margins for fiscal 1997
decreased to 60.4% in fiscal 1997 from 60.8% in fiscal 1996 as a result of an
increase in shrinkage and a less favorable product mix. Factory margins
decreased to 25.4% in fiscal 1997 from 30.3% in fiscal 1996 as a result of lower
than planned volume levels, increased overhead spending, provisions for obsolete
inventory and labor inefficiencies.
22
<PAGE>
Franchise Costs
Franchise costs increased $16,000 or 1.3% in fiscal 1997 compared to fiscal
1996. As a percentage of total royalty and marketing fees and franchise fee
revenue, franchise costs increased to 48.4% in fiscal 1997 from 46.9% in fiscal
1996. This increase resulted from a significant reduction in the number of new
franchises sold in fiscal 1997 versus 1996 without an attendant reduction in the
franchise infrastructure.
Sales & Marketing
Sales and Marketing increased 32.2% to $742,000 in fiscal 1997 from $561,000 in
fiscal 1996. The addition of an expanded marketing group to support corporate
public relations, promotional programs and marketing materials in support of the
Company's larger base of stores are the primary causes of this increase.
General and Administrative Expenses
General and Administrative expenses increased 39.0% from $1.4 million in fiscal
1996 to $2.0 million in fiscal 1997, primarily as a result of increased bad debt
expense, additional administrative support personnel and increased depreciation
expense related to investment in computer hardware and software. As a
percentage of total revenues, general and administrative expense increased from
7.7% in fiscal 1996 to 9.0% in 1997.
Retail Operating Expenses
Retail operating expenses increased from $4.4 million in fiscal 1996 to $6.5
million in fiscal 1997; an increase of 45.7%. This increase resulted primarily
from the effect of the larger number of Company-owned stores in existence
throughout the year and partially as a result of amortization of capitalized
expenditures incurred in the "start-up" phase of many new stores established in
late fiscal 1996. As a percentage of retail sales, retail operating expenses
increased from 57.2% in fiscal 1996 to 61.5% in fiscal 1997. This increase is a
result of a decline in same store retail sales at Company-owned Rocky Mountain
Chocolate Factory stores, increased expenses from the "start-up" effect
discussed above and as a result of sales volumes at many Company-owned stores
significantly below Company expectations.
Provision for Store Closures, Impairment Loss and Loss on Write-down of Assets
In fiscal 1997, a non-recurring restructuring charge of $1.8 million was
recorded representing the loss expected to result from the sale or closure of
certain Company-owned stores and from write-down of certain other store assets
considered impaired under provisions of Financial Accounting Standard (FAS) 121
"Accounting for the Impairment of Long-Lived Assets."
Other Expense
Other expense of $599,000 incurred in fiscal 1997 increased 147.5% from the
$242,200 incurred in fiscal 1996. Other expense increased as a result of
increased interest expense resulting from borrowings in support of the Company's
Company-owned store expansion and a non-recurring litigation settlement charge
of $154,000 for early lease terminations on certain Company-owned stores in
fiscal 1997.
Income Tax Expense
The Company's effective income tax rate in fiscal 1997 of 37.9% approximated the
37.0% in fiscal 1996.
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<PAGE>
Discontinued Operations
In December 1997, the Company decided its Fuzziwig's Candy Factory Store
("Fuzziwig's") segment did not meet its long-term strategic goals, and
accordingly, adopted a plan to discontinue its operations. On June 5, 1998, the
Company entered into a definitive agreement to sell substantially all the assets
of its Fuzziwig's segment for $1.6 million. The Company expects this
transaction to close on or about July 31, 1998.
The estimated loss on disposition of Fuzziwig's of $929,000 (inclusive of
estimated losses during the phase out period of $250,000), net of applicable
income tax benefit of $587,000, has been recorded in the accompanying statement
of operations for the year ending February 28, 1998.
The operating results of Fuzziwig's, including provisions for estimated
disposition costs, lease termination costs and operating losses during the
phase-out period totaling $1.5 million have been segregated from continuing
operations and reported as separate line items net of applicable income taxes in
the statements of operations for all periods reported.
Loss from discontinued operations was $.12 per diluted share in fiscal 1997
versus $.00 in fiscal 1996.
Net Income (Loss)
Net loss including discontinued operations was $.47 per diluted share in fiscal
1997 versus income of $.42 per diluted share in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of February 28, 1998, working capital was $3.9 million compared with $2.6
million as of February 28, 1997, a $1.3 million increase. This increase is
primarily the result of cash flows generated by operating and financing
activities in excess of cash flows used in investing activities.
Cash and cash equivalent balances increased from $793,000 as of February 28,
1997 to $1,795,000 as of February 28, 1998 as a result of cash flows generated
by operating and financing activities in excess of cash flows used in investing
activities. The Company's current ratio was 2.1 to 1 at February 28, 1998 in
comparison with 1.9 to 1 at February 29, 1997.
The Company's long-term debt is comprised primarily of a real estate mortgage
facility used to finance the Company's factory expansion (unpaid balance as
of February 28, 1998, $2.0 million), and chattel mortgage notes (unpaid
balance as of February 28, 1998, $5.1 million) used to fund the fiscal 1996
and 1997 Company-owned store expansion.
The Company had an unused $2.0 million credit line secured by substantially
all of the Company's assets except retail store assets and is subject to
renewal in July, 1998.
On May 15, 1998, the Company used its credit line to purchase and cancel 336,000
shares of its common stock for a purchase price of $1,730,000. The Company is
currently negotiating an extension of and an increase in its line of credit.
The Company is also in the process of securing certain fixed asset based
financings, the proceeds of which will be used to reduce amounts outstanding on
its credit line.
For fiscal 1999, the Company anticipates making capital expenditures of
approximately $900,000, $600,000 of which will be used for new store buildouts
and remodels, with
24
<PAGE>
the balance used to maintain and improve existing factory and administrative
infrastructure. The Company believes that cash flow from operations and
available bank lines of credit will be sufficient to fund capital expenditures
and working capital requirements for fiscal 1999.
IMPACT OF INFLATION
Inflationary factors such as increases in the costs of ingredients and labor
directly affect the Company's operations. Most of the Company's leases provide
for cost-of-living adjustments and require it to pay taxes, insurance and
maintenance expenses, all of which are subject to inflation. Additionally the
Company's future lease cost for new facilities may include potentially
escalating costs of real estate and construction. There is no assurance that the
Company will be able to pass on increased costs to its customers.
Depreciation expense is based on the historical cost to the Company of its fixed
assets, and is therefore potentially less than it would be if it were based on
current replacement cost. While property and equipment acquired in prior years
will ultimately have to be replaced at higher prices, it is expected that
replacement will be a gradual process over many years.
SEASONALITY
The Company is subject to seasonal fluctuations in sales, which cause
fluctuations in quarterly results of operations. Historically, the strongest
sales of the Company's products have occurred during the Christmas holiday and
summer vacation seasons. In addition, quarterly results have been, and in the
future are likely to be, affected by the timing of new store openings and sales
of franchises. Because of the seasonality of the Company's business and the
impact of new store openings and sales of franchises, results for any quarter
are not necessarily indicative of results that may be achieved in other quarters
or for a full fiscal year.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income,
which requires that an enterprise report, by major components and as a single
total, the change in its net assets during the period from non-owner sources;
and SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, which establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, geographic areas and major customers. Adoption of these standards
will not impact the Company's financial position, results of operations or cash
flows, and any effect will be limited to the form and content of its
disclosures. Both statements are effective for fiscal years beginning after
December 15, 1997, with earlier application permitted.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants 27
Statements of Operations 28
Balance Sheets 30
Statements of Changes in Stockholders Equity 31
Statements of Cash Flows 32
26
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Rocky Mountain Chocolate Factory, Inc.
We have audited the accompanying balance sheets of Rocky Mountain Chocolate
Factory, Inc. as of February 28, 1998 and 1997, and the related statements of
income, stockholders' equity, and cash flows for each of the three years in
the period ended February 28, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rocky Mountain Chocolate
Factory, Inc. as of February 28, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended February 28, 1998, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Dallas, Texas
April 24, 1998 (except for notes 11 and 13
as to which the dates are June 5, 1998
and May 15, 1998, respectively)
27
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FEBRUARY 28 OR 29,
1998 1997 1996
<S> <C> <C> <C>
REVENUES
Sales $ 20,659,076 $ 19,682,622 $ 15,903,838
Franchise and royalty fees 3,104,906 2,597,985 2,648,303
Total revenues 23,763,982 22,280,607 18,552,141
COSTS AND EXPENSES
Cost of sales 10,960,966 11,017,119 8,723,011
Franchise costs 1,106,172 1,258,361 1,242,674
Sales & marketing 1,290,516 741,603 560,832
General and administrative 1,763,757 1,996,476 1,436,551
Retail operating expenses 6,043,810 6,454,999 4,431,712
Provision for store closures - 1,358,398 -
Impairment loss - 149,000 -
Loss on write-down of assets - 330,587 -
Total costs and expenses 21,165,221 23,306,543 16,394,780
OPERATING INCOME (LOSS) 2,598,761 (1,025,936) 2,157,361
OTHER INCOME (EXPENSE)
Interest expense (664,852) (473,618) (299,792)
Litigation settlements - (154,300) -
Interest income 114,732 28,637 57,620
Other, net (550,120) (599,281) (242,172)
INCOME (Loss) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 2,048,641 (1,625,217) 1,915,189
INCOME TAX EXPENSE (BENEFIT) 788,640 (615,506) 708,110
INCOME (Loss) FROM CONTINUING
OPERATIONS 1,260,001 (1,009,711) 1,207,079
DISCONTINUED OPERATIONS
Income (loss) from
discontinued operations (net
of income taxes) (90,849) (355,991) 666
Provision for estimated loss
on disposition, including
provision for operating
losses during phase out
period of $153,250 (net of
income taxes) (929,234) - -
Total (1,020,083) (355,991) 666
NET INCOME (Loss) $ 239,918 $ (1,365,702)$ 1,207,745
</TABLE>
(CONTINUED)
The accompanying notes are an integral part of these statements.
28
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FEBRUARY 28 OR 29,
1998 1997 1996
<S> <C> <C> <C>
BASIC EARNINGS (LOSS) PER COMMON
SHARE
Continuing Operations $ .43 $ (.35) $ .43
Discontinued Operations (.35) (.12) -
Net Income $ .08 $ (.47) $ .43
DILUTED EARNINGS (LOSS) PER
COMMON SHARE
Continuing Operations $ .43 $ (.35) $ .42
Discontinued Operations (.35) (.12) -
Net Income $ .08 $ (.47) $ .42
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 2,912,387 2,908,492 2,797,201
DILUTIVE EFFECT OF EMPLOYEE
STOCK OPTIONS 17,158 - 89,769
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, ASSUMING DILUTION 2,929,545 2,908,492 2,886,970
</TABLE>
The accompanying notes are an integral part of these statements.
29
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF FEBRUARY 28,
1998 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,795,381 $ 792,606
Accounts and notes receivable, less allowance for
doubtful accounts of $214,152 and $202,029 2,174,618 1,496,682
Refundable income taxes 483,448 233,289
Inventories 2,567,966 2,082,566
Deferred income taxes 257,176 722,595
Other 103,195 178,067
Net current assets of discontinued operations 44,351 231,821
Total current assets 7,426,135 5,737,626
PROPERTY AND EQUIPMENT, NET 9,672,443 9,740,341
OTHER ASSETS
Net non-current assets of discontinued operations 1,555,681 2,360,211
Accounts and notes receivable 279,122 82,774
Goodwill, less accumulated amortization of $325,848
and 277,344 596,152 312,656
Other 338,359 432,522
Total other assets 2,769,314 3,188,163
Total assets $19,867,892 $18,666,130
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,132,900 $ 847,881
Accounts payable 1,296,769 799,671
Accrued salaries and wages 707,737 465,338
Other accrued expenses 339,481 867,961
Deferred income - 93,000
Total current liabilities 3,476,887 3,073,851
LONG-TERM DEBT, LESS CURRENT MATURITIES 5,993,273 5,737,312
DEFERRED INCOME TAXES 378,272 76,025
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock, $.03 par value; 7,250,000 shares
authorized; 2,912,449 and 2,912,299 shares issued
and outstanding 87,373 87,369
Additional paid-in capital 8,719,604 8,719,008
Retained earnings 1,212,483 972,565
Total stockholders' equity 10,019,460 9,778,942
Total liabilities and stockholders' equity $19,867,892 $18,666,130
</TABLE>
The accompanying notes are an integral part of these statements.
30
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FEBRUARY 28 OR 29,
1998 1997 1996
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of year $ 87,369 $ 87,155 $ 78,900
Repurchase and redemption of common
stock - - (3,750)
Issuance of common stock 4 4 10,130
Conversion of preferred stock to common - - 435
Exercise of stock options - 210 1,440
Balance at end of year 87,373 87,369 87,155
PREFERRED STOCK
Balance at beginning of year - - 1,462
Conversion of preferred stock to common - - (1,309)
Redemption of preferred stock - - (153)
Balance at end of year - - -
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year 8,719,008 8,691,960 4,695,923
Repurchase and redemption of common
stock - - (1,007,581)
Issuance of common stock 596 1,008 4,848,180
Conversion of preferred stock to common - - 874
Exercise of stock options - 26,040 180,435
Redemption of preferred stock - - (25,871)
Balance at end of year 8,719,604 8,719,008 8,691,960
RETAINED EARNINGS
Balance at beginning of year 972,565 2,338,267 1,130,522
Net income (loss) for the year 239,918 (1,365,702) 1,207,745
Balance at end of year 1,212,483 972,565 2,338,267
TOTAL STOCKHOLDERS EQUITY $10,019,460 $ 9,778,942 $11,117,382
COMMON SHARES
Balance at beginning of year 2,912,299 2,905,149 2,629,986
Repurchase and redemption of common
stock - - (125,000)
Issuance of common stock 150 150 337,650
Conversion of preferred stock to common - - 14,513
Exercise of stock options - 7,000 48,000
Balance at end of year 2,912,449 2,912,299 2,905,149
PREFERRED SHARES
Balance at beginning of year - - 14,610
Redemption of preferred stock - - (1,532)
Conversion of preferred stock to common - - (13,078)
Balance at end of year - - -
</TABLE>
The accompanying notes are an integral part of these statements.
31
<PAGE>
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FEBRUARY 28 OR 29,
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 239,918 $(1,365,702) $ 1,207,745
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
(Gain) loss from discontinued operations 90,849 355,991 (666)
Provision for estimated loss on
disposition of business 929,234 - -
Depreciation and amortization 1,335,715 1,383,212 787,296
Asset impairment and store closure losses - 1,781,985 -
Gain on sale of assets (76,474) (72,707) -
Changes in operating assets and liabilities:
Accounts and notes receivable (158,353) 232,733 (260,338)
Refundable income taxes (250,159) (233,289) -
Inventories (485,400) 378,020 (773,570)
Other assets 74,872 45,934 (113,896)
Accounts payable 497,098 (198,849) 159,403
Income taxes payable - (287,518) (229,101)
Deferred income taxes 767,666 (856,020) 118,173
Accrued liabilities (286,081) 220,270 55,080
Deferred income (93,000) 93,000 -
Net cash provided by operating activities
of continuing operations 2,585,885 1,477,060 950,126
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 8,602 310,690 -
Purchase of other assets (233,380) (328,940) (65,535)
Purchase of property and equipment (1,984,940) (2,251,598) (4,853,283)
Net cash used in investing activities (2,209,718) (2,269,848) (4,918,818)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit - (1,000,000) 1,000,000
Proceeds from long-term debt 1,522,043 7,071,852 1,500,000
Payments on long-term debt (981,063) (2,805,074) (1,678,332)
Proceeds from issuance of common stock 600 1,012 4,858,310
Proceeds from exercise of stock options - 26,250 181,875
Redemption of preferred stock - - (26,024)
Repurchase and redemption of common stock - - (1,011,331)
Net cash provided by financing activities 541,580 3,294,040 4,824,498
NET CASH PROVIDED BY (USED IN)
DISCONTINUED OPERATIONS 85,028 (2,237,433) (709,924)
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,002,775 263,819 145,882
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 792,606 528,787 382,905
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,795,381 $ 792,606 $ 528,787
</TABLE>
The accompanying notes are an integral part of these statements.
32
<PAGE>
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company is a manufacturer of an extensive line of premium chocolate candy
for sale to its franchised and Company-owned Rocky Mountain Chocolate Factory
stores located throughout the United States, Guam, and Canada. The Company is
also a retail operator and international franchiser. The majority of the
Company's revenues are generated from wholesale and retail sales of candy. The
balance of the Company's revenues are generated from royalties and marketing
fees, based on a franchisee's monthly gross sales, and from franchise fees,
which consist of fees earned from the sale of franchises.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are
computed using the straight-line method based upon the estimated useful life of
the asset. Leasehold improvements are amortized on the straight-line method
over the lives of the respective leases or the service lives of the
improvements, whichever is shorter.
Amortization of Goodwill
Goodwill is amortized on the straight-line method over ten to twenty-five years.
Franchise and Royalty Fees
Franchise fee revenue is recognized upon completion of all significant initial
services provided to the franchisee and upon satisfaction of all material
conditions of the franchise agreement. In addition to the initial franchise
fee, the Company receives a royalty fee of five percent (5%) and a marketing and
promotion fee of one percent (1%) of the Rocky Mountain Chocolate Factory
franchised stores' gross sales.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, the disclosure of
contingent assets and liabilities, at the date of the financial statements, and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Additionally, estimates of losses anticipated to result from store closure and
impairment are based on the best information currently available to management.
Such estimates may differ materially from results actually produced by store
closure as a result of uncertainties in the amount of finally negotiated lease
settlements, the amount of operating losses sustained by the stores to their
dates of closure and in the amount recoverable by sale or redeployment of assets
of stores to be closed. Estimates of impairment losses on underperforming
Company-owned stores to remain open have been made based on forecasts of future
operating results and cash flows of such stores, which forecasts are also
susceptible to uncertainties and may change materially in the near term.
33
<PAGE>
Vulnerability Due to Certain Concentrations
The Company's stores are concentrated (50%) in the factory outlet mall
environment. At February 28, 1998, 34 Company-owned stores and 76 franchise
stores of 220 total stores are located in this environment. The Company is,
therefore, vulnerable to changes in consumer traffic in this market environment
and to changes in the level of construction of additional, new factory outlet
mall locations.
Cash Equivalents
Cash equivalents include cash in excess of daily requirements which is invested
in various financial instruments having an original maturity of three months or
less.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation" encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value.
The Company has chosen to continue to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion No.
25 (APB 25), "Accounting for Stock Issued to Employees" and provides the
required pro forma disclosures prescribed by SFAS 123.
Earnings (Loss) Per Share
In fiscal 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings per Share. SFAS No. 128 requires
companies to present basic earnings per share and diluted earnings per share.
Basic earnings per share is computed as net earnings (loss) divided by the
weighted average number of common shares outstanding during each year of
2,912,387, 2,908,492 and 2,797,201, for the fiscal years ended February 28 or
29, 1998, 1997 and 1996. Diluted earnings per share reflects the potential
dilution that could occur from common shares issuable through stock options,
adjusted for 17,158 and 89,769 incremental shares assumed issued on the exercise
of common stock options during the fiscal years ended February 28, 1998 and
February 29, 1996. The effect of stock options in 1997 would be antidilutive.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
short-term investments in money market funds, other liquid assets, trade
receivables, payables, notes receivable, and debt. The fair value of all
instruments approximates the carrying value.
Reclassifications
Certain reclassifications have been made to prior years' financial statements in
order to conform with the presentation of the February 28, 1998 financial
statements.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income,
which prescribes standards for reporting comprehensive income and its
components. Comprehensive income consists of net income or loss for the current
period and other comprehensive income (income, expenses, gains and losses that
currently bypass the income statement and are reported directly as a separate
component of equity). SFAS No. 130 requires that components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.
34
<PAGE>
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS - CONTINUED
In 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographical areas and major
customers.
Adoption of these statements will not impact the Company's financial position,
results of operations or cash flows and any effect will be limited to the form
and content of disclosures. Both SFAS No. 130 and SFAS No. 131 are effective
for the Company in fiscal 1999.
NOTE 3 - INVENTORIES
Inventories consist of the following at February 28:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Ingredients and supplies $1,153,433 $1,041,367
Finished candy 1,414,533 1,041,199
$2,567,966 $2,082,566
</TABLE>
NOTE 4 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following at February 28:
<TABLE>
<CAPTION>
Property and equipment 1998 1997
<S> <C> <C>
Land $ 513,618 $ 122,558
Building 3,665,581 3,644,357
Machinery and equipment 6,023,347 5,449,261
Furniture and fixtures 2,072,208 2,267,437
Leasehold improvements 1,389,608 1,410,948
Transportation equipment 293,357 246,499
13,957,719 13,141,060
Less accumulated depreciation 4,285,276 3,400,719
Property and equipment, net $ 9,672,443 $ 9,740,341
</TABLE>
NOTE 5 - LINE OF CREDIT AND LONG-TERM DEBT
Line of Credit
At February 28, 1998 the Company had a $2,000,000 line of credit from a bank,
collateralized by substantially all of the Company's assets with exception of
the Company's retail store assets. Draws may be made under the line at 75% of
eligible accounts receivable plus 30% of eligible inventory up to $500,000.
Interest on borrowings is at prime (8.5% at February 28, 1998 and 8.25% at
February 28, 1997). Terms of the line require that the line be rested (that is,
that there be no outstanding balance) for a period of 60 consecutive days during
the term of the loan. The credit line expires in July, 1998.
The terms of the Line of Credit and notes payable with the bank provide for the
maintenance of certain financial covenants. Due to the level of capital
spending the Company was out of compliance with one covenant for the year ended
February 28, 1998. The Company received a waiver for such non-compliance.
35
<PAGE>
NOTE 5 - LINE OF CREDIT AND LONG-TERM DEBT - CONTINUED
Line of Credit - Continued
On May 15, 1998, the Company used its line of credit to fund the purchase of
336,000 shares and to lend certain officers and directors funds to acquire
40,000 shares of its issued and outstanding common stock. See Note 13.
<TABLE>
<CAPTION>
Long-Term Debt
Long-term debt consists of the following at February 28:
1998 1997
<S> <C> <C>
Chattel mortgage note payable in monthly installments of $10,500 through
March, 2001 including interest at 8.25% per annum, collateralized by
machinery, equipment, furniture and fixtures. $ 320,793 $ 415,557
Real estate mortgage note payable in monthly installments of $17,490
through April, 2011; interest rate of 8.25%; collateralized by land and
factory building. Interest adjusted to prime in May, 2001 and every five
years thereafter until maturity in April 2016.
1,969,930 1,614,033
Chattel mortgage note payable in monthly
installments of $12,359 through April, 2002
including interest at 8.25% per annum,
collateralized by equipment 521,427 622,158
Chattel mortgage note payable in monthly installments of $24,613 through
April, 2003 including interest at 8.94% per annum, collateralized by
machinery, equipment, furniture and fixtures. 1,251,663 1,434,090
Chattel mortgage note payable in monthly installments of $5,472 through
January, 2002; interest rate of
10.36%; collateralized by machinery, equipment, furniture and fixtures. 210,669 248,849
Chattel mortgage note payable in monthly installments of $6,396 through
April, 2003 including interest at 9.72% per annum, collateralized by
equipment, furniture and fixtures 326,001 368,783
Chattel mortgage note payable in monthly installments of $10,177 through
October, 2001 including interest at 10.35% per annum, collateralized by
machinery, equipment, furniture and fixtures. 371,265 450,432
Chattel mortgage notes payable in monthly
installments of $43,031 through March 2002 including interest at 8.75% to
9.44% per annum, collateralized by equipment, furniture and fixtures. 1,604,344 1,431,291
36
<PAGE>
NOTE 5 - LINE OF CREDIT AND LONG-TERM DEBT - CONTINUED
Long-Term Debt - Continued
Chattel mortgage notes payable in monthly installments of $13,251 through
July, 2002 including interest at 10.5% per annum, collateralized by
machinery, equipment, furniture and fixtures. 550,081 -
7,126,173 6,585,193
Less current maturities 1,132,900 847,881
$ 5,993,273 $ 5,737,312
</TABLE>
Maturities of long-term debt are as follows for the years ending February 28 or
29:
<TABLE>
<S> <C>
1999 $ 1,132,900
2000 1,241,915
2001 1,345,878
2002 1,132,483
2003 531,827
Thereafter 1,741,170
$ 7,126,173
</TABLE>
NOTE 6 - OPERATING LEASES
The Company conducts its retail sales operations in facilities leased under five
to ten year noncancelable operating leases. Certain leases contain renewal
options for between two and ten additional years at increased monthly rentals.
The majority of the leases provide for contingent rentals based on sales in
excess of predetermined base levels.
The following is a schedule by year of future minimum rental payments required
under such leases for the year ending February 28 or 29:
<TABLE>
<S> <C>
1999 $ 1,168,423
2000 1,067,964
2001 966,151
2002 566,743
2003 366,306
Thereafter 442,562
$ 4,578,149
</TABLE>
In some instances, in order to retain the right to site selection or because of
requirements imposed by the lessor, the Company has leased space for its
proposed franchise outlets. When a franchise was sold, the store was subleased
to the franchisee who is responsible for the monthly rent and other obligations
under the lease. The Company's liability as primary lessee on sublet franchise
outlets, all of which is offset by sublease rentals, is as follows for the years
ending February 28 or 29:
<TABLE>
<S> <C>
1999 $ 1,239,663
2000 1,067,406
2001 848,167
2002 563,461
2003 307,461
Thereafter 577,264
$ 4,603,422
</TABLE>
37
<PAGE>
NOTE 6 - OPERATING LEASES - CONTINUED
The following is a schedule of lease expense for all operating leases for the
three years ended February 28 or 29:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Minimum rentals $ 2,454,744 $ 2,278,591 $ 1,547,817
Less sublease rentals (1,294,202) (1,184,301) (982,780)
Contingent rentals 100,771 47,116 56,037
$ 1,261,313 $ 1,141,406 $ 621,074
</TABLE>
NOTE 7 - INCOME TAXES
Income tax expense (benefit) relating to continuing operations is comprised of
the following for the years ending February 28 or 29:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current
Federal $ 18,520 $ 230,618 $ 533,052
State 2,454 9,896 56,885
Total Current 20,974 240,514 589,937
Deferred
Federal 677,849 (768,992) 110,327
State 89,817 (87,028) 7,846
Total Deferred 767,666 (856,020) 118,173
Total $ 788,640 $ (615,506) $ 708,110
</TABLE>
A reconciliation of the statutory federal income tax rate and the effective rate
as a percentage of pretax income is as follows for the years ending February 28
or 29:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
Goodwill amortization .4% .4% .4%
State income taxes, net of federal
benefit 3.1% 3.0% 2.2%
Other 1.0% .5% .4%
Effective Rate 38.5% 37.9% 37.0%
</TABLE>
The components of deferred income taxes at February 28, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Deferred Tax Assets 1998 1997
Allowance for doubtful accounts $ 82,877 $ 99,728
Accrued compensation 70,774 63,666
Deferred income - 35,944
Contribution carryover 26,511 9,610
Loss provisions 206,902 767,796
Alternative minimum tax carryforward 85,689 85,689
Deferred lease rentals 26,167 33,914
498,920 1,096,347
Deferred Tax Liabilities - Depreciation (620,016) (449,777)
Net deferred tax asset (liability) $ (121,096) $ 646,570
</TABLE>
38
<PAGE>
NOTE 8 - PREFERRED STOCK
On February 15, 1995, the Company called for redemption all outstanding shares
of its $1.00 Cumulative Convertible Preferred Stock at a redemption price of
$10.41, including $.21 in unpaid, accrued dividends. As of March 17, 1995, all
preferred shares had been converted or redeemed.
Each share of the $1.00 Cumulative Convertible Preferred stock was entitled to a
cumulative annual dividend of $1.00 and was convertible into common stock at
$9.00 per share of common stock with each share of preferred stock being valued
at $10.00 for the purpose of such conversion. The conversion price was subject
to adjustment in certain events. The value of each share of preferred stock for
the purpose of conversion was increased by the amount of all unpaid cumulative
dividends. The preferred stock was redeemable at the option of the Company at a
call price of $10.20 per share plus cumulative dividends.
NOTE 9 - STOCK OPTION PLANS
Under the Company's 1985 Incentive Stock Option Plan (the "1985 Plan") options
to purchase 215,000 shares of the Company's common stock were granted at prices
not less than market value at the date of grant. The 1985 Plan expired in
October 1995. Options granted under the 1985 Plan could not have a term
exceeding ten years. Options representing the right to purchase 90,000 shares of
the Company's common stock remained outstanding under the 1985 Plan at February
28, 1998.
Under the 1995 Stock Option Plan (the "1995 Plan") and the Nonqualified Stock
Option Plan for Nonemployee Directors (the "Director's Plan"), options to
purchase up to 150,000 and 90,000 shares, respectively, of the Company's common
stock may be granted at prices not less than market value at the date of grant.
Options granted may not have a term exceeding ten years. Options representing
the right to purchase 160,000 and 40,000 shares of the Company's common stock
were outstanding under the 1995 Plan and Director's Plan, respectively, at
February 28, 1998.
Options become exercisable over a one to five year period from the date of the
grant. The options outstanding under these plans will expire, if not exercised,
in March 1998 through January 2007. Options for 151,000 shares were exercisable
at February 28, 1998.
The Company has adopted the disclosure-only provisions of Financial Accounting
Standard No. 123 "Accounting for Stock-Based Compensation". In accordance with
those provisions, the Company applies APB opinion 25 and related interpretations
in accounting for its stock option plans and, accordingly, does not recognize
compensation cost if the exercise price is not less than market. If the Company
had elected to recognize compensation cost based on the fair value of the
options granted at grant date as prescribed by Financial Accounting Standard
123, net income (loss) and diluted income (loss) per share would have been
reduced to the pro-forma amounts indicated in the table below for the years
ending February 28 (in 000's except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net Income (Loss)-as reported $ 240 $ (1,366) $ 1,208
Net Income (Loss)-pro forma $ 177 $ (1,530) $ 876
Basic Income (Loss) per Share-as reported $ .08 $ (.47) $ .43
Diluted Income (Loss) per Share-as reported $ .08 $ (.47) $ .42
Basic Income (Loss) per Share-pro forma $ .06 $ (.53) $ .31
Diluted Income (Loss) per Share-pro forma $ .06 $ (.53) $ .30
</TABLE>
39
<PAGE>
NOTE 9 - STOCK OPTION PLANS - CONTINUED
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model utilizing the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Expected dividend yield 0% 0% 0%
Expected stock price volatility 65% 50% 50%
Risk-free interest rate 6.0% 6.5% 6.5%
Expected life of options 7 years 7 years 7 years
</TABLE>
Additional information with respect to options outstanding under the Plans at
February 28, 1998, and changes for the three years then ended was as follows:
<TABLE>
<CAPTION>
1998
Weighted
Average
Shares Exercise Price
<S> <C> <C>
Outstanding at beginning of year 272,000 $ 9.01
Granted 55,000 4.55
Forfeited (37,000) 11.80
Outstanding at end of year 290,000 7.81
Options exercisable at February 28,
1998 151,000 9.22
Weighted average fair value per share
of options granted during 1998 was
$3.44.
</TABLE>
<TABLE>
<CAPTION>
1997
Weighted
Average
Shares Exercise Price
<S> <C> <C>
Outstanding at beginning of year 224,000 $ 11.95
Granted 111,000 7.05
Exercised (7,000) 3.75
Canceled (56,000) 18.25
Outstanding at end of year 272,000 9.01
Options exercisable at February 28,
1997 161,000 10.11
Weighted average fair value per share
of options granted during 1997 was
$4.04.
</TABLE>
40
<PAGE>
NOTE 9 - STOCK OPTION PLANS - CONTINUED
<TABLE>
<CAPTION>
1996
Weighted
Average
Shares Exercise Price
<S> <C> <C>
Outstanding at beginning of year 186,000 $ 6.95
Granted 87,000 18.19
Exercised (48,000) 3.79
Forfeited (1,000) 18.25
Outstanding at end of year 224,000 11.95
Options exercisable at February 28,
1997 200,000 11.19
Weighted average fair value per share
of options granted during 1996 was
$10.79.
</TABLE>
Information about stock options outstanding at February 28, 1998 is summarized
as follows:
<TABLE>
<CAPTION>
Options Outstanding
Weighted average
Number remaining Weighted average
Range of exercise prices outstanding contractual life exercise price
<S> <C> <C> <C>
$3.125 to 4.50 105,000 6.19 years $ 4.06
$5.125 to 7.75 117,000 8.05 years 7.11
$11.50 to 18.00 68,000 6.40 years 14.79
290,000
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
Weighted
Number average
Range of exercise prices exercisable exercise price
<S> <C> <C>
$3.125 to 4.50 53,000 $ 3.62
$5.125 to 7.75 30,800 6.62
$11.50 to 18.00 67,200 14.83
151,000
</TABLE>
NOTE 10 - LOSS PROVISIONS
Loss provisions were provided as follows in the fiscal year ended February 28,
1997:
Store Closures
On February 11, 1997 the Company adopted a plan to close eight underperforming
Company-owned stores. The Company made a loss provision in February, 1997 for
closure of these stores in the total amount of $1,302,000 including $138,000 for
estimated operating losses to date of closure, $473,000 for estimated cost of
settlement of leases, and $691,000 for writedown of store assets to their
estimated recoverable values. A loss provision of $56,000 was made in February,
1997 for estimated cost of settlement of leases relating to the Company's
liability as primary lessee on sublet franchise outlets (also see Note 6).
41
<PAGE>
NOTE 10 - LOSS PROVISIONS - CONTINUED
Long-Lived Asset Impairments
An impairment loss for retail operations was recognized in the amount of
$597,000 for six underperforming Company-owned stores to remain open. Current
and historical operating and cash flow losses indicate that recorded asset
values for these stores are not fully recoverable. Assets with net book value
of $885,000 were reduced to their estimated fair value based on prices of
similar assets or estimated present value of future net cash flows expected to
be generated from the stores.
Asset Obsolescence and Dispositions
A loss provision was made in the amount of $331,000 for estimated loss on future
disposition of certain obsolete factory assets and to reduce to net realizable
value certain surplus fixtures and equipment utilized in Company-owned stores.
Litigation Settlements
In fiscal 1997 the Company settled in the amount of $154,000, litigation brought
against it for premature lease termination resulting from closure in fiscal 1996
of one Company-owned store and of one franchised store where the Company was the
primary lessee on the franchisee-sublet location.
NOTE 11 - DISCONTINUED OPERATION
In December 1997, the Company decided its Fuzziwig's Candy Factory Store
("Fuzziwig's") segment did not meet its long-term strategic goals, and
accordingly, adopted a plan to discontinue its operations.
On June 5, 1998, the Company entered into a definitive agreement to sell
substantially all the assets of its Fuzziwig's segment for $1.6 million. The
Company expects this transaction to close on or about July 31, 1998 (the
"Closing Date"). The purchase price includes $180,000 cash, $100,000 of
which is payable at the Closing Date and the remaining $80,000 due six
months from the Closing Date. Pursuant to the agreement, the Company will
receive four Rocky Mountain Chocolate Factory stores currently operated as
franchised stores by one of the purchasers and valued at approximately $1.42
million.
The estimated loss on disposition of Fuzziwig's of $929,000 (inclusive of
estimated losses during the phase out period of $250,000), net of applicable
income tax benefit of $587,000, has been recorded in the accompanying statement
of operations for the year ending February 28, 1998. Losses related to the
disposition amounted to $653,234 for the fourth quarter.
Operating results of the discontinued operation have been reclassified from
amounts previously reported and have been reported separately in the statements
of operations.
42
<PAGE>
NOTE 11 - DISCONTINUED OPERATION - CONTINUED
Summarized financial information for the discontinued operation for the years
ended February 28 or 29 follow:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Revenues $ 2,928,403 $ 1,991,863 $ 191,157
Income (loss) from the discontinued
operation, net of income tax (benefit)
expense of ($57,235), ($217,008), (90,849) (355,991) 666
and $390
Provision for loss on disposal, net of
income tax benefit of $586,766 (929,234) - -
The net assets of the discontinued operation have been segregated in the
February 28, 1998 and 1997 balance sheets as follows:
</TABLE>
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net current assets:
Inventories $ 178,765 $ 228,755
Other current assets 29,803 3,066
Deferred income taxes 103,673 -
Current liabilities (267,890) -
$ 44,351 $ 231,821
Net non-current assets:
Net property, plant and equipment $ 1,159,969 $ 2,035,027
Other assets 38,067 206,115
Deferred income taxes 357,645 119,069
$ 1,555,681 $ 2,360,211
</TABLE>
NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION
For the three years ended February 28 or 29:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest Paid $ 658,700 $ 469,237 $ 301,481
Income Taxes Paid (Received) (30,619) 436,932 812,589
Non-Cash Financing Activities:
Company Financed Sales of Retail Store
Assets 715,931 110,000 -
Conversion of Preferred Stock into
Common Stock 1,309
</TABLE>
NOTE 13 - SUBSEQUENT EVENT
On May 15, 1998, the Company purchased 336,000 shares and certain of its
directors and executive officers purchased 104,000 shares of the Company's
issued and outstanding common stock at $5.15 per share from La Salle National
Bank of Chicago, Illinois, which obtained these shares through foreclosure from
certain shareholders. The Company loaned certain officers and directors the
funds to acquire 40,000 of the 104,000 shares purchased by them. The loans are
secured by the related shares, bear interest payable annually at 7.5% and are
due May 15, 2003.
43
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers and Directors
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Franklin E. Crail......... 56 Chairman of the Board, President,
Treasurer and Director
Edward L. Dudley.......... 34 Vice President - Sales and Marketing
Gary S. Hauer............. 53 Vice President - Manufacturing and
Director
Clifton W. Folsom......... 44 Vice President - Franchise Support
Jay B. Haws............... 47 Vice President - Creative Services
Bryan J. Merryman......... 37 Vice President - Finance and Chief
Financial Officer
Virginia M. Perez......... 60 Corporate Secretary
Lee N. Mortenson.......... 62 Director
Fred M. Trainor........... 59 Director
Gerald A. Kien............ 67 Director
Everett A. Sisson......... 77 Director
</TABLE>
Franklin E. Crail
Mr. Crail co-founded the first Rocky Mountain Chocolate Factory store in
May 1981. Since the incorporation of the Company in November 1982, he has served
as its President and a Director, and since September 1981 as its Treasurer. He
was elected Chairman of the Board in March 1986. Prior to founding the Company,
Mr. Crail was co-founder and president of CNI Data Processing, Inc., a software
firm which developed automated billing systems for the cable television
industry.
Edward L. Dudley
Mr. Dudley joined the Company in January 1997 to spearhead the Company's
newly-formed Product Sales Development function as Vice President - Sales and
Marketing, with the goal of increasing the Company's factory and retail sales.
During his 10 year career with Baxter Healthcare Corporation, Mr. Dudley served
in a number of senior marketing and sales management capacities, including most
recently that of Director, Distribution Services from March 1996 to January
1997. Mr. Dudley holds B.S. degrees in Finance and Accounting from the
University of Colorado.
Gary S. Hauer
Mr. Hauer joined the Company in May 1996 as Vice President of Manufacturing and
has served as a Director of the Company since June 1996. Mr. Hauer has served
in a number of manufacturing management capacities over a 28 year career in the
chocolate candy and confectionery industries, including 18 years with See's
Candies, the last 10 years of which he served as plant manager. Mr. Hauer
possesses a B.S. in business administration from San Jose State University.
Clifton W. Folsom
Mr. Folsom has served as Vice President of Franchise Support of the Company
since June 1989. He joined the Company in May 1983 as Director of Franchise
Sales and Support, and was promoted in March 1985 to Vice President of Franchise
Sales, a
44
<PAGE>
position he held until he began serving in his current capacity in June 1989.
From March 1978 until joining the Company, Mr. Folsom was employed as a sales
representative by Sears Roebuck & Company.
Jay B. Haws
Mr. Haws joined the Company in August 1991 as Vice President of Creative
Services. Since 1981, Mr. Haws had been closely associated with the Company
both as a franchisee and marketing/graphic design consultant. From 1986 to
1991 he was Vice-President and President of Chocolate Factory, Inc., which
operated two Rocky Mountain Chocolate Factory franchises located in San
Francisco, California. From 1983 to 1989 he served as Vice President of
Marketing for Image Group, Inc., a marketing communications firm based in
Northern California. Concurrently, Mr. Haws was co-owner of two other Rocky
Mountain Chocolate Factory franchises located in Sacramento and Walnut Creek,
California. From 1973 to 1983 he was principal of Jay Haws and Associates, an
advertising and graphic design agency. Mr. Haws holds a B.A. in graphics
design and communication from California State University.
Bryan J. Merryman
Mr. Merryman joined the Company in December 1997 as Vice President-Finance
and Chief Financial Officer. Prior to joining the Company, Mr. Merryman was a
principal in Knightsbridge Holdings, Inc. (a leveraged buyout firm) from January
1997 to December 1997. Mr. Merryman also served as Chief Financial Officer of
Super Shops, Inc., a retailer and manufacturer of aftermarket auto parts
from July 1996 to November 1997 and was employed for more than eleven years by
Deloitte and Touche LLP, most recently as a senior manager.
Virginia M. Perez
Ms. Perez joined the Company in June 1996 and has served as the Company's
corporate secretary since February, 1997. From 1992 until joining the Company,
she was employed by Huettig & Schromm, Inc., a property management and
development firm in Palo Alto, California as executive assistant to the
president and owner. Huettig & Schromm developed, owned and managed over
1,000,000 square feet of office space in business parks and office buildings on
the San Francisco peninsula. Ms. Perez is a paralegal and has held various
administrative positions during her career including executive assistant to the
Chairman and owner of Sunset Magazine & Books, Inc.
Gerald A. Kien
Dr. Kien was first elected as a Director of the Company in August 1995. From
1993 to 1995 Dr. Kien served as President and Chief Executive Officer of Remote
Sensing Technologies, Inc., a subsidiary of Envirotest Systems, Inc., a company
engaged in the development of instrumentation for vehicle emissions testing.
From 1989 to 1993 Dr. Kien served as Chairman, President and Chief Executive
Officer of Sun Electric Corporation, a manufacturer of automotive test
equipment, and has served as a Director and as Chairman of the Executive
Committee of that Company since 1980. Sun Electric merged with Snap-On Tools in
1993, and Dr. Kien remained as President of the Sun Electric division of Snap-On
Tools until his retirement in 1994. Dr. Kien was a co-founder of the First
National Bank of Hoffman Estates and remained as a Director from 1979 to 1990,
and was a Director of the Charter Bank and Trust of Illinois from 1984 to 1990.
He served as a Director of Systems Control, Inc. and Vehicle Test Technologies,
Inc., from 1989 to 1993, both of which are engaged in emissions testing of motor
vehicles. Dr. Kien received his Ph.D. from the University of Illinois Graduate
College of Medicine, in 1959.
45
<PAGE>
Lee N. Mortenson
Mr. Mortenson has served on the Board of Directors of the Company since 1987.
Mr. Mortenson has served as President, Chief Operating Officer and a Director of
Telco Capital Corporation of Chicago, Illinois since January 1984. Telco Capital
Corporation is principally engaged in the manufacturing and real estate
businesses. He was President, Chief Executive Officer and a Director of
Sunstates Corporation (formerly Acton Corporation) from May 1988 to December
1990 and he has been President, Chief Operating Officer and a Director of
Sunstates Corporation since December 1990. Sunstates Corporation is a publicly
traded company primarily engaged in real estate development and manufacturing.
Mr. Mortenson has been a Director of Alba-Waldensian, Inc., which is principally
engaged in the manufacturing of apparel and medical products, since 1984 and has
served as its President and Chief Executive Officer since February 1997. Mr.
Mortenson has also served as a Director of NRG Inc., a leasing company, since
1987. On December 24, 1996, an Agreed Order of Liquidation with a finding of
insolvency was entered under the Illinois Insurance Code against the principal
subsidiary of Sunstates Corporation, Coronet Insurance Company ("Coronet"), and
Coronet's subsidiaries, National Assurance Indemnity Company ("National
Assurance") and Crown Casualty Company ("Crown"), pursuant to which, among other
things, all of the assets of Coronet, National Assurance and Crown were
transferred to the Office of the Special Deputy for the purposes of winding up
the affairs of such companies. On February 27, 1997, a consent order appointing
the Florida Department of Insurance as Receiver for purposes of liquidation was
entered under the Florida Insurance Code against Casualty Insurance Company of
Florida ("Casualty"), a subsidiary of Coronet. Mr. Mortenson, prior to March
14, 1997, was a Director and President of each of Coronet, National Assurance,
Crown and Casualty. On January 24, 1997, Hickory White Company, a furniture
manufacturing subsidiary of Sunstates Corporation, filed a voluntary petition
under Chapter 11 of the Federal Bankruptcy Code. All of the assets of Hickory
White Company were sold to an unrelated party on March 11, 1997. Mr. Mortenson
is Vice President and a Director of Hickory White Company.
Everett A. Sisson
Mr. Sisson was first elected as a Director of the Company in August 1995.
Mr. Sisson is President of The American Growth Group, which is engaged in land
development, investment, management services and management consulting, a
position he has held since he formed the firm in 1966. Mr. Sisson served as a
Director of the Century Companies of America, a company providing life insurance
and related financial products, from 1962 until 1991, and Chairman of the Board
from 1977 until 1983. Mr. Sisson was a Director of Coronet from 1992 through
February 1997. During various periods over the past 20 years, Mr. Sisson served
as a Director and member of several Board committees of Libco Corporation,
Wisconsin Real Estate Investment Trust, Hickory Furniture Company, Telco Capital
Corporation, Greater Heritage Corporation, Indiana Financial Investors Inc.,
Sunstates Corporation and Acton Corporation.
Fred M. Trainor
Mr. Trainor has served as a Director since August 1992. Mr. Trainor is the
founder, and since 1984 has served as Chief Executive Officer and President of
AVCOR Health Care Products, Inc., Fort Worth, Texas, a manufacturer and marketer
of specialty dressings products. Prior to founding AVCOR Health Care Products,
Inc., in 1984, Mr. Trainor was a founder, Chief Executive Officer and President
of Tecnol, Inc. of Fort Worth, Texas, also a company involved with the health
care industry. Before founding Tecnol, Inc., Mr. Trainor was with American
Hospital Supply Corporation (AHSC) for 13 years in a number of management
capacities.
46
<PAGE>
The Board of Directors has a standing Audit Committee and Compensation
Committee, each consisting of Messrs. Mortenson, Trainor, Sisson and Kien.
Currently, all Directors of the Company are elected annually by the stockholders
and hold office until their respective successors are elected and qualified.
SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company has no knowledge that any Director, executive officer or 10%
stockholder was required to file a Form 5 for fiscal 1998 and failed to do so,
and the Company has received a written representation that a Form 5 was not
required from each such person. In making these disclosures, the Company has
relied solely on written representations of its directors, executive officers
and 10% stockholders and copies of the reports filed by them with the Securities
and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to annual
compensation paid for the years indicated to the Company's "Named Officers". No
other executive officers of the Company met the minimum compensation threshold
of $100,000 for inclusion in the table.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS-
ANNUAL COMPENSATION SECURITIES
UNDERLYING
NAME AND PRINCIPAL OPTIONS ALL OTHER
POSITION YEAR SALARY(1) BONUS (#)(2) COMPENSATION(3)
<S> <C> <C> <C> <C> <C>
Franklin E. Crail,
Chairman of the Board
and President 1998 $150,000 - - $2,250
1997 $150,000 - - $2,250
1996 $146,538 $10,000 - $1,833
Gary S. Hauer,
Vice President -
Manufacturing 1998 $100,000 $12,500 - $2,250
1997(4) $ 75,071 - 30,000 -
1996 - - - -
</TABLE>
(1) Includes amounts deferred at the Named Officers' election pursuant to
the Company's 401(k) Plan.
(2) Options to acquire shares of Common Stock under the 1995 Stock Option
Plan. All options have ten-year terms. The options granted vest with
respect to one-fifth of the shares covered thereby annually beginning
on the date of grant.
(3) Represents Company contributions on behalf of the Named Officers under
the Company's 401(k) Plan.
(4) Mr. Hauer joined the Company as an officer in May 1996.
Additional columns required by Securities and Exchange Commission rules to be
included in the foregoing table, and certain additional tables required by such
rules, have been omitted because no compensation required to be disclosed
therein was paid or awarded to the Named Officers.
47
<PAGE>
OPTION GRANTS DURING FISCAL 1998
Neither of the Named Officers received grants in fiscal 1998.
AGGREGATED OPTION EXERCISES DURING FISCAL 1998 AND FISCAL YEAR END OPTION VALUES
The following table provides information regarding the number and value of
options held by the Named Officers at fiscal year end. No options were
exercised by the Named Officers during fiscal 1998. The Company does not have
any outstanding stock appreciation rights.
<TABLE>
<CAPTION>
Number of Securities
Shares Underlying Unexercised Value of Unexercised In-
Acquired on Value Options at Fiscal the-Money Options at Fiscal
Exercise Realized Year End (#) Year End ($) (1)
Name (#) (#) Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Franklin E. Crail - - - - - -
Gary S. Hauer - - 6,000 24,000 - -
</TABLE>
(1) The closing bid price of the Common Stock on the Nasdaq Stock Market on
February 27, 1998, was $4.75 per share. None of the options held
by the Named Officers were in the money on that date.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive any compensation for serving on the
Board or on committees. Directors who are not officers or employees are entitled
to receive stock option awards under the Company's 1990 Nonqualified Stock
Option Plan for Nonemployee Directors (the "Director's Plan").
The Director's Plan, as amended, provides for automatic grants of nonqualified
stock options covering a maximum of 90,000 shares of Common Stock of the Company
to Directors of the Company who are not also employees or officers of the
Company and who have not made an irrevocable, one-time election to decline to
participate in the plan. The Director's Plan provides that during the term of
the plan options will be granted automatically to new nonemployee Directors upon
their election. Each such option permits the nonemployee Director to purchase
10,000 shares of Common Stock at an exercise price equal to the fair market
value of the Common Stock on the date of grant of the option. Each nonemployee
Director's option may be exercised in full during the period beginning one year
after the grant date of such option and ending ten years after such grant date,
unless the option expires sooner due to termination of service or death.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board of Directors consists of Lee
N. Mortenson, Fred M. Trainor, Gerald A. Kien, and Everett A. Sisson. None of
the foregoing persons is or has been an officer of the Company.
48
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information, at May 29, 1998, with respect to (i)
each person known to the Company to be the beneficial owner of more than 5% of
the Company's Common Stock, (ii) the shares of the Company's Common Stock
beneficially owned by each Director and nominee (which includes the Named
Officers) and (iii) by Directors and executive officers of the Company as a
group.
The number of shares beneficially owned includes shares of Common Stock in which
the persons named below have either investment or voting power. A person is
also deemed to be the beneficial owner of a security if that person has the
right to acquire beneficial ownership of that security within sixty (60) days
through the exercise of an option or through the conversion of another security.
Except as noted, each beneficial owner has sole investment and voting power with
respect to the Common Stock.
Common Stock not outstanding that is subject to options is deemed to be
outstanding for the purpose of computing the percentage of Common Stock
beneficially owned by the person holding such options, but is not deemed to be
outstanding for the purpose of computing the percentage of Common Stock
beneficially owned by any other person.
<TABLE>
<CAPTION>
Common Stock
Amount and
Name of Nature of Percent
Beneficial Beneficial of
Owner Ownership Class
<S> <C> <C> <C>
Franklin E. Crail (1) 298,107 11.5%
Clyde Wm. Engle et al. (1) 219,357 (2) 8.5%
Fred M. Trainor 70,000 (4) 2.7%
Gary S. Hauer 31,991 (3) 1.2%
Everett A. Sisson 10,000 (4) .4%
Gerald A. Kien 10,000 (4) .4%
Lee N. Mortenson 21,000 (4) .8%
All executive officers
and directors as a
group (10 persons) 565,502 (5) 21.8%
</TABLE>
(1) Mr. Engle's address is 4433 West Touhy Avenue, Lincolnwood, Illinois
60646. Mr. Crail's address is the same as the Company's address.
(2) The following information was provided to the Company by Mr. Engle. Of the
219,357 shares indicated as being beneficially owned by Mr. Engle, 115,000
shares are owned by GSC Enterprises, Inc., a corporation in which Mr. Engle
owns a majority interest, and 10,000 shares are owned beneficially by
members of Mr. Engle's immediate family. Mr. Engle disclaims beneficial
ownership of the shares owned by his family members.
(3) Includes 12,000 shares Mr. Hauer has the right to acquire within 60 days
through the exercise of employee stock options previously granted to him
and 5,991 shares beneficially owned by his wife. Mr. Hauer disclaims
beneficial ownership of the shares owned by his wife. Mr. Hauer has
pledged 8,000 shares owned by him to the Company to secure payment of
certain indebtedness to the Company incurred by Mr. Hauer in connection
with his purchase of such shares.
(4) Includes 10,000 shares that Messrs. Mortenson, Trainor, Sisson and Kien
each has the right to acquire within 60 days through the exercise of
options granted
49
<PAGE>
pursuant to the Director's Plan. Mr. Mortenson has pledged 8,000 shares
owned by him to the Company to secure payment of certain indebtedness to
the Company incurred by Mr. Mortenson in connection with his purchase of
such shares.
(5) Includes shares which officers and directors as a group have the right to
acquire through the exercise of options granted pursuant to the Company's
1985 Incentive Stock Option Plan, 1995 Stock Option Plan, and the
Director's Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NONE
PART IV.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountants 27
Statements of Operations 28
Balance Sheets 30
Statements of Changes in Stockholders' Equity 31
Statements of Cash Flows 32
</TABLE>
2. Financial Statement Schedules
Schedules have been omitted because the required information is not
present or not present in amounts sufficient to require submission of
the schedule, or because the information required is included in the
financial statements or the notes thereto.
50
<PAGE>
3. Exhibits
<TABLE>
<CAPTION>
Exhibit Incorporated by
Number Description Reference to
<S> <C> <C>
3.1 Articles of Incorporation of Exhibit 3.1 to Current Report
the Registrant, as amended on Form 8-K of the Registrant
filed on August 1, 1988.
3.2 By-laws of the Registrant, as Filed herewith.
amended on November 25, 1997
4.1 Specimen Common Stock Exhibit 4.1 to Current Report
Certificate on Form 8-K of the Registrant
filed on August 1, 1988.
4.2 Term Loan and Credit Agreement Exhibit 4.18 to the Annual
dated April 5, 1996 in the amount Report on Form 10-K of
of $2,000,000 between Norwest Registrant for the fiscal year
Banks and the Registrant ended February 29, 1996.
4.3 Amendments dated February 5, 1997, Exhibit 4.12 to the Annual
May 2, 1997, and May 22, 1997 to Report on Form 10-K of the
Term Loan and Credit Agreement Registrant for the fiscal year
dated April 5, 1996 in the amount ended February 28, 1997.
of $2,000,000 between Norwest
Banks and the Registrant
4.4 Amendments dated December 23, Filed herewith.
1997, March 9, 1998, & May 6,
1998 to Term Loan and Credit
Agreement dated April 5, 1996
in the amount of $2,000,000
between Norwest Banks and the
Registrant
4.5 Instruments with respect to
long-term debt not exceeding
10% of the total assets of the
Company have not been filed.
The Company agrees to furnish
a copy of such instruments to
the Securities and Exchange
Commission upon request.
10.1 Form of Stock Option Agreement Exhibit 10.3 to the Annual
for Incentive Stock Option Report on Form 10-K of the
Plan of the Registrant * Registrant for the fiscal
year ended February 28, 1986.
10.2 Incentive Stock Option Plan of Exhibit 10.2 to the Annual
the Registrant as amended July Report on Form 10-K of the
27, 1990 * Registrant for the fiscal year
ended February 28, 1991.
10.4 Current form of franchise Exhibit 10.4 to the Annual
agreement used by the Report on Form 10-K of the
Registrant Registrant for the fiscal
year ended February 28, 1997.
10.5 Form of Real Estate Lease Exhibit 10.7 to Registration
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated by
Number Description Reference to
<S> <C> <C>
between the Registrant as Statement on Form S-18
Lessee and franchisee as (Registration No. 33-2016-D).
Sublessee
10.7 Form of Nonqualified Stock Exhibit 10.8 to the Annual
Option Agreement for Report on Form 10-K of the
Nonemployee Directors of the Registrant for the fiscal
Registrant * year ended February 28, 1991.
10.8 Nonqualified Stock Option Plan Exhibit 10.9 to the Annual
for Nonemployee Directors Report on Form 10-K of the
dated March 20, 1990 * Registrant for the fiscal
year ended February 28, 1991.
10.9 1995 Stock Option Plan of the Exhibit 10.9 to Registration
Registrant* Statement on Form S-1
(Registration No. 33-62149)
filed August 25, 1995.
10.10 Forms of Incentive Stock Exhibit 10.10 to Registration
Option Agreement for 1995 Statement on Form S-1
Stock Option Plan* (Registration No. 33-62149)
filed on August 25, 1995.
10.11 Forms of Nonqualified Stock Exhibit 10.11 to Registration
Option Agreement for 1995 Statement on Form S-1
Stock Option Plan* (Registration No. 33-62149)
filed on August 25, 1995.
10.12 Form of Indemnification Filed herewith.
Agreement between the
Registrant and its directors
10.13 Form of Indemnification Filed herewith.
Agreement between the
Registrant and its officers
10.14 Form of Promissory Note and Filed herewith.
Stock Pledge Agreement between
the Registrant and certain
of its officers and directors
10.15 Asset Purchase Agreement dated Filed herewith.
June 5, 1998 between the
Registrant as seller and
Resort Confections, Inc. et al.,
as purchasers
11.1 Statement re: computation of Filed herewith.
per share earnings
23.1 Consent of Independent Public Filed herewith.
Accountants
27.1 Fiscal 1998 Financial Data Filed herewith.
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated by
Number Description Reference to
<S> <C> <C>
Schedule
27.2 Restated fiscal 1997 Financial Filed herewith.
Data Schedule
27.3 Restated fiscal 1996 Financial Filed herewith.
Data Schedule.
</TABLE>
* Management contract or compensatory plan
(b) REPORTS ON FORM 8-K.
-------------------
No reports on Form 8-K were filed by the Registrant during the fourth
quarter of the year ended February 28, 1998.
53
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ROCKY MOUNTAIN CHOCOLATE
FACTORY, INC.
By/S/ Bryan J. Merryman
-------------------
BRYAN J. MERRYMAN
Vice-President - Finance
Chief Financial Officer
Date: June 10, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: June 10, 1998 /S/ Franklin E. Crail
--------------------------
FRANKLIN E. CRAIL
Chairman of the Board of
Directors, President,
Treasurer and Director
(principal executive officer)
Date: June 10, 1998 /S/ Bryan J. Merryman
--------------------------
BRYAN J. MERRYMAN
Vice President - Finance
Chief Financial Officer
(principal financial and
accounting officer)
Date: June 10, 1998 /S/ Gary S. Hauer
--------------------------
GARY S. HAUER
Vice President - Manufacturing,
Director
Date: June 10, 1998 /S/ Gerald A Kien
--------------------------
GERALD A. KIEN, Director
Date: June 10, 1998 /S/ Lee N. Mortenson
--------------------------
LEE N. MORTENSON, Director
Date: June 10, 1998 /S/ Everett A. Sisson
--------------------------
EVERETT A. SISSON, Director
Date: June 10, 1998 /S/ Fred M. TRAINOR
--------------------------
FRED M. TRAINOR, Director
54
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Incorporated by Numbered
Number Description Reference to Page
<C> <S> <S>
3.1 Articles of Exhibit 3.1 to Current Report
Incorporation of the on Form 8-K of the Registrant
Registrant, as amended filed on August 1, 1988.
3.2 By-laws of the Filed herewith.
Registrant, as amended
on November 25, 1997
4.1 Specimen Common Stock Exhibit 4.1 to Current Report
Certificate on Form 8-K of the Registrant
filed on August 1, 1988.
4.2 Term Loan and Credit Exhibit 4.18 to the Annual
Agreement dated April 5, Report on Form 10-K of
1996 in the amount of Registrant for the fiscal
$2,000,000 between year ended February 29, 1996.
Norwest Banks and the
Registrant
4.3 Amendments dated Exhibit 4.12 to the Annual
February 5, 1997, May 2, Report on Form 10-K of the
1997, and May 22, 1997 Registrant for the fiscal year
to Term Loan and Credit ended February 28, 1997.
Agreement dated April 15,
1996 in the amount of
$2,000,000 between
Norwest Banks and the
Registrant
4.4 Amendments dated Filed herewith.
December 23, 1997,
March 9, 1998, & May 6,
1998 to Term Loan and
Credit Agreement dated
April 5, 1996 in the
amount of $2,000,000
between Norwest Banks and
the Registrant
4.5 Instruments with
respect to long-term
debt not exceeding 10%
of the total assets of
the Company have not
been filed. The
Company agrees to
furnish a copy of such
instruments to the
Securities and Exchange
Commission upon
request.
10.1 Form of Stock Option Exhibit 10.3 to The Annual
Agreement for the Report on Form 10-K of the
Registrant * Registrant for the fiscal year
ended February 28, 1986.
10.2 Incentive Stock Option Exhibit 10.2 to the Annual
Plan of the Registrant Report on Form 10-K of the
as amended July 27, Registrant for the fiscal year
1990 * ended February 28, 1991.
10.4 Current form of Exhibit 10.4 to the Annual
franchise agreement Report on Form 10-K of the
used by the Registrant Registrant for the fiscal year
ended February 28, 1997.
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Incorporated by Numbered
Number Description Reference to Page
<C> <S> <S>
10.5 Form of Real Estate Exhibit 10.7 to Registration
Lease between the Statement on Form S-18
Registrant as Lessee (Registration No. 33-2016-D).
and franchisee as
Sublessee
10.7 Form of Nonqualified Exhibit 10.8 to the Annual
Stock Option Agreement Report on Form 10-K of the
for Nonemployee Registrant for the fiscal year
Directors for the ended February 28, 1991.
Registrant *
10.8 Nonqualified Stock Exhibit 10.9 to the Annual
Option Plan for Report on Form 10-K of the
Nonemployee Directors Registrant for the fiscal year
dated March 20, 1990 * ended February 28, 1991.
10.9 1995 Stock Option Plan Exhibit 10.9 to Registration
of the Registrant* Statement on Form S-1
(Registration No. 33-62149)
filed August 25, 1995.
10.10 Forms of Incentive Exhibit 10.10 to Registration
Stock Option Agreement Statement on Form S-1
for 1995 Stock Option (Registration No. 33-62149)
Plan* filed on August 25, 1995.
10.11 Forms of Nonqualified Exhibit 10.11 to Registration
Stock Option Agreement Statement on Form S-1
for 1995 Stock Option (Registration No. 33-62149)
Plan* filed on August 25, 1995.
10.12 Form of Indemnification Filed herewith.
Agreement between the
Registrant and its
directors
10.13 Form of Indemnification Filed herewith.
Agreement between the
Registrant and its
officers
10.14 Form of Promissory Note Filed herewith.
and Stock Pledge Agreement
between the Registrant and
certain of its officers
and directors
10.15 Asset Purchase Filed herewith.
Agreement dated June 5,
1998 between the
Registrant as seller and
Resort Confections, Inc.
et al., as purchasers
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Incorporated by Numbered
Number Description Reference to Page
<C> <S> <S>
11.1 Statement re: Filed herewith.
computation of per
share earnings
23.1 Consent of Independent Filed herewith.
Public Accountants
27.1 Fiscal 1998 Financial Filed herewith.
Data Schedule
27.2 Restated fiscal 1997 Filed herewith.
Financial Data Schedule
27.3 Restated fiscal 1996 Filed herewith.
Financial Data Schedule
</TABLE>
57
<PAGE>
Exhibit 3.2
<PAGE>
BY-LAWS OF
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
(As Amended on November 25, 1997)
ARTICLE I
OFFICES
Section 1. The registered office of the corporation shall be located at
Durango, Colorado.
Section 2. The corporation may also have offices at such other places
both within and without the State of Colorado as the board of directors may from
time to time determine or the business of the corporation may require.
ARTICLE II
ANNUAL MEETING OF SHAREHOLDERS
Section 1. All meetings of the shareholders for the election of
directors shall be held in the City of Durango, State of Colorado, at such place
as may be fixed from time to time by the board of directors, or such other place
either within or without the State of Colorado as shall be designated from time
to time by the board of directors and stated in the notice of the meeting.
Section 2. Annual meetings of shareholders shall be held at such time
and place as shall be designated from time to time by the board of directors and
stated in the notice of the meeting, at which the shareholders shall elect by a
plurality vote a board of directors, and transact such other business as may
properly be brought before the meeting.
Section 3. Written or printed notice of the annual meeting stating the
place, day and hour of the meeting shall be delivered not less than ten (10) nor
more than sixty (60) days before
<PAGE>
the date of the meeting, either personally or by mail, by or at the direction of
the president, the secretary, or the officer or persons calling the meeting, to
each shareholder of record entitled to vote
at such meeting. Notice shall be deemed to be delivered when deposited in the
United States mail, postage prepaid, addressed to each shareholder of record
entitled to vote at the meeting at that shareholder's address as it appears on
the records of the corporation.
Section 4. Only proposals by shareholders made in accordance with the
procedures set forth in this Section 4 shall be eligible for inclusion on the
agenda of any annual or special meeting of shareholders.
(a) NOMINATION OF DIRECTORS. The board of directors shall act as a
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the
death, refusal to serve or other incapacity of a management nominee, the
nominating committee shall deliver written nominations to the secretary at
least 20 days prior to the date of the annual meeting. Provided such
committee makes such nominations, no nominations for directors except those
made by the nominating committee shall be voted upon at the annual meeting
unless other nominations by shareholders are made in accordance with the
provisions of this Section 4. Nominations of individuals for election to
the board of directors of the corporation at an annual meeting of
shareholders may be made by any shareholder of the corporation entitled to
vote for the election of directors at that meeting who complies with the
notice procedures set forth in this Section 4.Such nominations, other than
those made by the board of directors acting as nominating committee, shall
be made pursuant to timely notice in writing to the secretary of the
corporation as set forth in this Section 4.
-2-
<PAGE>
(b) OTHER PROPOSALS. Any shareholder of the corporation entitled to
vote at any annual or special meeting of shareholders may make nominations
for the election of directors and other proper proposals for inclusion on
the agenda of any such meeting provided such shareholder complies with the
timely notice provisions set forth in this Section 4 (as well as any
additional requirements under any applicable law or regulation).
(c) TIMELY NOTICE. A shareholder's notice shall be delivered to or
mailed and received at the principal executive offices of the corporation
(i) in the case of a special meeting, not less than 30 days nor more than
75 days prior to the meeting date specified in the notice of such meeting,
provided, however, that in the event that less than 40 days' notice or
prior public disclosure of the date of a special meeting is given or made
to shareholders, notice by the shareholder to be timely must be so received
not later than the close of business on the 10th day following the day on
which such notice of the date of the special meeting was mailed or such
public disclosure was made, and (ii) in the case of any annual meeting, not
less than 75 days prior to the day and month on which, in the immediately
preceding year, the annual meeting for such year was held. Such
shareholder's notice shall set forth (as is applicable in any given
instance) (a) as to each person whom the shareholder proposes to nominate
for election or re-election as a director, (i) the name, age, business
address and residence address of such person, (ii) the principal occupation
or employment of such person, currently and for at least the preceding five
years, (iii) the class and number of shares of stock of the corporation
that are beneficially owned by such person, (iv) a description of all
arrangements or understandings between such person and such shareholder, or
any other persons (naming them), pursuant to which the nomination is to be
made by the shareholder, (v) such other
-3-
<PAGE>
information as would be required to be disclosed in solicitations of proxies
with respect to nominees for election as directors pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended, and (vi) such person's
written consent to being named as a nominee and to serving as a director, if
elected; (b) as to each action item requested to be included on the agenda, a
description, in sufficient detail, of the purpose and effect of the proposal to
the extent necessary to properly inform all shareholders entitled to vote
thereon prior to any such vote; and (c) as to the shareholder giving the notice,
(i) the name and address, as they appear on the corporation's books, of such
shareholder, (ii) the class and number of shares of stock of the corporation
beneficially owned by such shareholder and (iii) a representation that such
shareholder will appear at the meeting to nominate the person, or to submit the
proposal, specified in the notice. No person shall be elected as a director of
the corporation unless nominated in accordance with the procedures set forth in
this Section 4. The Chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by the bylaws, and if he should so
determine, he shall so declare to the meeting and the defective nomination shall
be disregarded. Ballots bearing the names of all the persons nominated by the
nominating committee and by shareholders shall be provided for use at the annual
meeting. If in response to any proposal properly submitted in accordance with
this Section 4 the nominating committee shall fail or refuse to act at least 20
days prior to the annual meeting, nominations for directors may be made at the
annual meeting by any shareholder entitled to vote and shall be voted upon.
-4-
<PAGE>
ARTICLE III
SPECIAL MEETINGS OF SHAREHOLDERS
Section 1. Special meetings of shareholders for any purpose other than
the election of directors may be held at such time and place within or without
the State of Colorado as shall be stated in the notice of the meeting or in a
duly executed waiver of notice thereof.
Section 2. Special meetings of the shareholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the articles of
incorporation, may be called by the president, the board of directors, or the
holders of not less than one-tenth (1/10) of all the shares entitled to vote at
the meeting.
Section 3. Written or printed notice of a special meeting stating the
place, day and hour of the meeting and the purpose or purposes for which the
meeting is called, shall be delivered not less than ten (10) nor more than sixty
(60) days before the date of the meeting, either personally or by mail, by or at
the direction of the president, the secretary, or the officer or persons calling
the meeting, to each shareholder of record entitled to vote at such meeting.
Notice shall be deemed to be delivered when deposited in the United States mail,
postage prepaid, addressed to each shareholder of record entitled to vote at the
meeting at that shareholder's address as it appears on the records of the
corporation.
Section 4. The business transacted at any special meeting of
shareholders shall be limited to the purposes stated in the notice.
ARTICLE IV
QUORUM AND VOTING OF STOCK
Section 1. The holders of a majority of the shares of stock issued and
outstanding and entitled to vote, represented in person or by proxy, shall
constitute a quorum at all meetings of
-5-
<PAGE>
the shareholders for the transaction of business except as otherwise provided by
statute or by the articles of incorporation. If, however, such quorum shall not
be present or represented at any meeting of the shareholders, the shareholders
present in person or represented by proxy shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified.
Section 2. If a quorum is present, the affirmative vote of a majority
of the shares of stock represented at the meeting shall be the act of the
shareholders unless the vote of a greater number of shares of stock is required
by law or the articles of incorporation.
Section 3. Each outstanding share of stock, having voting power, shall
be entitled to one vote on each matter submitted to a vote at a meeting of
shareholders. A shareholder may vote either in person or by proxy executed in
writing by the shareholder or by his duly authorized attorney-in-fact.
In all elections for directors every shareholder entitled to vote
shall have the right to vote, in person or by proxy, the number of shares of
stock owned by that shareholder, for as many persons as there are directors to
be elected, or to cumulate the vote of said shares, and give one candidate as
many votes as the number of directors multipled by the number of his shares of
stock shall equal, or to distribute the votes on the same principle among as
many candidates as he may see fit.
Section 4. Any action required to be taken at a meeting of the
shareholders may be taken without a meeting if a consent in writing, setting
forth the action so taken, shall be signed by all of the shareholders entitled
to vote with respect to the subject matter thereof.
-6-
<PAGE>
ARTICLE V
DIRECTORS
Section 1. The number of directors shall be no fewer than three (3) nor
more than nine (9). Directors need not be residents of the State of Colorado
nor shareholders of the corporation. The directors, other than the first board
of directors, shall be elected at the annual meeting of the shareholders, and
each director elected shall, unless he or she shall resign or otherwise be
removed pursuant to these Bylaws and/or the Colorado Corporation Code, serve
until the next succeeding annual meeting and until his or her successor shall
have been elected and qualified. The first board of directors shall hold office
until the first annual meeting of shareholders.
Section 2. Vacancies and newly created directorships resulting from any
increase in the number of directors may be filled by a majority of the directors
then in office, though less than a quorum, and the directors so chosen shall
hold office until the next annual election and until their successors are duly
elected and shall qualify. Also, newly created directorships resulting from any
increase in the number of directors may be filled by election at an annual or at
a special meeting of shareholders called for that purpose.
Section 3. The business affairs of the corporation shall be managed by
its board of directors, which may exercise all such powers of the corporation
and do all such lawful acts and things as are not by statute or by the articles
of incorporation or by these by-laws directed or required to be exercised or
done by the shareholders.
Section 4. The directors may keep the books of the corporation, except
such as are required by law to be kept within the state, outside of the State of
Colorado, at such place or places as they may from time to time determine.
-7-
<PAGE>
Section 5. The board of directors, by the affirmative vote of a
majority of the directors then in office, and irrespective of any personal
interest of any of its members, shall have authority to establish reasonable
compensation of all directors for services to the corporation as directors,
officers or otherwise.
Section 6. The entire board of directors or any lesser number may be
removed, with or without cause, by a vote of the holders of the majority of the
shares then entitled to vote at an election of directors, at a meeting called
expressly for that purpose. If less than the entire board is to be removed, no
one of the directors may be removed if the votes cast against his or her removal
would be sufficient to elect that director if then cumulatively voted at an
election of the entire board of directors.
ARTICLE VI
MEETINGS OF THE BOARD OF DIRECTORS
Section 1. Meetings of the board of directors, regular or special, may
be held either within or without the State of Colorado.
Section 2. The first meeting of each newly-elected board of directors
shall be held immediately following the annual meeting of the shareholders at
which the newly-elected board of directors was so elected, unless such other
time and place for such meeting shall be fixed by the vote of the shareholders
at the annual meeting. No notice of such meeting shall be necessary to the
newly elected directors in order legally to constitute the meeting, provided
that a quorum shall be present. The first meeting of the newly-elected
directors may also convene at such place and time as shall be fixed by the
consent in writing of all the directors.
-8-
<PAGE>
Section 3. Regular meetings of the board of directors may be held at
such time and at such place as shall from time to time be determined by the
board. No notice need be given of such regular meetings.
Section 4. Special meetings of the board of directors may be called by
the president on forty-eight (48) hours' notice to each director, delivered by
mail, or on twenty-four (24) hours' notice, delivered personally or by telegram.
Special meetings shall be called by the president or secretary in like manner
and on like notice on the written request of two directors. Notice by mail
shall be deemed to be delivered when deposited in the United States mail,
postage prepaid, addressed to each director at his or her address as it appears
on the records of the corporation. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the board of directors
need be specified in the notice or waiver of notice of such meeting.
Section 5. A majority of the directors shall constitute a quorum for
the transaction of business unless a greater number is required by law or by the
articles of incorporation. The act of a majority of the directors present at
any meeting at which a quorum is present shall be the act of the board of
directors, unless the act of a greater number is required by statute or by the
articles of incorporation. If a quorum shall not be present at any meeting of
directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
Section 6. Any action required or permitted to be taken at a meeting of
the directors may be taken without a meeting if a consent in writing, setting
forth the action so taken, shall be signed by all of the directors entitled to
vote with respect to the subject matter thereof.
-9-
<PAGE>
ARTICLE VII
EXECUTIVE AND OTHER COMMITTEES
Section 1. The board of directors, by resolution adopted by a majority
of the number of directors fixed by the by-laws or otherwise, may designate from
among its members an executive committee and one or more other committees, each
of which, to the extent provided in such resolution, shall have and exercise all
of the authority of the board of directors in the management of the corporation,
except that no such committee shall have the authority to: (i) declare
dividends or distributions; (ii) approve or recommend to shareholders actions or
proposals required by law to be approved by shareholders; (iii) fill vacancies
on the board of directors or any committee thereof; (iv) amend the by-laws; (v)
approve a plan of merger not requiring shareholder approval; (vi) reduce earned
or capital surplus; (vii) authorize or approve the reacquisition of shares
unless pursuant to a general formula or method specified by the board of
directors; or (viii) authorize or approve the issuance or sale of, or any
contract to issue or sell, shares, or designate the terms of a series of a class
of shares, and except that the board of directors, having acted regarding
general authorization for the issuance or sale of shares or any contract
therefor and, in the case of a series, the designation thereof, may, pursuant to
a general formula or method specified by the board by resolution or by adoption
of a stock option or other plan, authorize a committee to fix the terms of any
contract for the sale of the shares and to fix the terms upon which such shares
may be issued or sold, including, without limitation, the price, the dividend
rate, provisions for redemption, sinking fund, conversion, or voting or
preferential rights, and provisions for other features of a class of shares or a
series of a class of shares, with full power in such committee to adopt any
final resolution setting forth all terms thereof and to authorize the statement
of the terms of a series for filing with the secretary of state under law.
-10-
<PAGE>
Section 2. Vacancies in the membership of any committee shall be filled
by the board of directors at a regular or special meeting of the board of
directors. The executive committee shall keep regular minutes of its
proceedings and report the same to the board when required.
ARTICLE VIII
OFFICERS
Section 1. The officers of the corporation shall be chosen by the board
of directors and shall be a president, a vice-president, a secretary and a
treasurer. The board of directors may also choose additional vice-presidents,
and one or more assistant secretaries and assistant treasurers.
Section 2. The board of directors at its first meeting after each
annual meeting of shareholders shall choose a president, one or more
vice-presidents, a secretary and a treasurer, none of whom need be a member of
the board. Any two or more offices may be held by the same person, except the
offices of president and secretary.
Section 3. The board of directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board of directors.
Section 4. The salaries of all officers and agents of the corporation
shall be fixed by the board of directors.
Section 5. The officers of the corporation shall hold office until
their successors are chosen and qualify. Any officer elected or appointed by
the board of directors may be removed at any time by the affirmative vote of a
majority of the board of directors. Any vacancy occurring in any office of the
corporation shall be filled by the board of directors.
-11-
<PAGE>
THE PRESIDENT
Section 6. The president shall be the chief executive officer of the
corporation, shall preside at all meetings of the shareholders and the board of
directors, shall have general and active management of the business of the
corporation and shall see that all orders and resolutions of the board of
directors are carried into effect.
Section 7. The president shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
board of directors to some other officer or agent of the corporation.
THE VICE-PRESIDENTS
Section 8. The vice-president, or if there shall be more than one, the
vice-presidents, in the order determined by the board of directors, shall, in
the absence or disability of the president, perform the duties and exercise the
powers of the president and shall perform such other duties and have such other
powers as the board of directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARIES
Section 9. The secretary shall attend all meetings of the board of
directors and all meetings of the shareholders and record all the proceedings of
the meetings of the corporation and of the board of directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. The secretary shall give, or cause to be given, notice of all
meetings of the shareholders and special meetings of the board of directors, and
shall perform such other duties as may be prescribed by the board of directors
or president, under whose supervision he shall be. The secretary shall have
custody of the corporate seal of the corporation
-12-
<PAGE>
and shall have, or an assistant secretary shall have, authority to affix the
same to any instrument requiring it and when so affixed, it may be attested by
his or her signature or by the signature of such assistant secretary. The board
of directors may give general authority to any other officer to affix the seal
of the corporation and to attest the affixing by his signature.
Section 10. The assistant secretary, or if there be more than one, the
assistant secretaries in the order determined by the board of directors, shall,
in the absence or disability of the secretary, perform the duties and exercise
the powers of the secretary and shall perform such other duties and have such
other powers as the board of directors may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 11. The treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all monies
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the board of directors.
Section 12. The treasurer shall disburse the funds of the corporation as
may be ordered by the board of directors, taking proper vouchers for such
disbursements, and shall render to the president and the board of directors, at
its regular meetings, or when the board of directors so requires, an account of
all transactions as treasurer and of the financial condition of the corporation.
Section 13. If required by the board of directors, the treasurer shall
give the corporation a bond in such sum and with such surety or sureties as
shall be satisfactory to the board of directors for the faithful performance of
the duties of the office and for the restoration to the corporation, in case of
the treasurer's death, resignation, retirement or removal from office, of
-13-
<PAGE>
all books, papers, vouchers, money and other property of whatever kind in the
possession or under the control of the treasurer belonging to the corporation.
Section 14. The assistant treasurer, or, if there shall be more than
one, the assistant treasurers in the order determined by the board of directors,
shall, in the absence or disability of the treasurer, perform the duties and
exercise the powers of the treasurer and shall perform such other duties and
have such other powers as the board of directors may from time to time
prescribe.
ARTICLE IX
INDEMNIFICATION
Section 1. The corporation shall indemnify any director, officer,
agent, or employee as to those liabilities and on those terms and conditions as
are specified in Section 7-3-1101(o) of the Colorado Corporation Code.
Section 2. In any event, the corporation shall have the right to
purchase and maintain insurance on behalf of any such persons against any
liability asserted against or incurred by such person whether or not the
corporation would have the power to indemnify such person against the liability
insured against.
ARTICLE X
CERTIFICATES FOR SHARES
Section 1. The shares of the corporation shall be represented by
certificates signed by the chairman or vice chairman of the board of directors
or by the president or a vice-president and by the treasurer or an assistant
treasurer or by the secretary or an assistant secretary of the corporation, and
may be sealed with the seal of the corporation or a facsimile thereof.
-14-
<PAGE>
When the corporation is authorized to issue shares of more than one class
there shall be set forth upon the face or back of the certificate, or the
certificate shall have a statement that the corporation will furnish to any
shareholder upon request and without charge, a full statement of the
designations, preferences, limitations, and relative rights of the shares of
each class authorized to be issued and, if the corporation is authorized to
issue any preferred or special class in series, the variations in the relative
rights and preferences between the shares of each such series so far as the same
have been fixed and determined and the authority of the board of directors to
fix and determine the relative rights and preferences of subsequent series.
Section 2. The signatures of the officers of the corporation upon a
certificate may be facsimiles if the certificate is countersigned by a transfer
agent, or registered by a registrar, other than the corporation itself or an
employee of the corporation. In case any officer who has signed or whose
facsimile signature has been placed upon such certificate shall have ceased to
be such officer before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer at the date of its
issue.
LOST CERTIFICATES
Section 3. The board of directors may direct a new certificate to be
issued in place of any certificate theretofore issued by the corporation alleged
to have been lost or destroyed. When authorizing such issue of a new
certificate, the board of directors, in its discretion and as a condition
precedent to the issuance thereof, may prescribe such terms and conditions as it
deems expedient, and may require such indemnities as it deems expedient, and may
require such indemnities as it deems adequate, to protect the corporation from
any claim that may be made against it with respect to any such certificate
alleged to have been lost or destroyed.
-15-
<PAGE>
TRANSFER OF SHARES
Section 4. Upon surrender to the corporation or the transfer agent of
the corporation of a certificate representing shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, a new certificate shall be issued to the person entitled thereto, and
the old certificate cancelled and the transaction recorded upon the books of the
corporation.
CLOSING OF TRANSFER BOOKS
Section 5. For the purpose of determining shareholders entitled to
notice of or to vote at any meeting of shareholders, or any adjournment thereof
or entitled to receive payment of any dividend, or in order to make a
determination of shareholders for any other proper purpose, the board of
directors may provide that the stock transfer books shall be closed for a stated
period but not to exceed, in any case, seventy (70) days. If the stock transfer
books shall be closed for the purpose of determining shareholders entitled to
notice of or to vote at a meeting of shareholders, such books shall be closed
for at least ten (10) days immediately preceding such meeting. In lieu of
closing the stock transfer books, the board of directors may fix in advance a
date as the record date for any such determination of shareholders, such date in
any case to be not more than seventy (70) days and, in case of a meeting of
shareholders, not less than ten (10) days prior to the date on which the
particular action requiring such determination of shareholders is to be taken.
If the stock transfer books are not closed and no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders, or shareholders entitled to receive payment of a dividend, the
date on which notice of the meeting is mailed or the date on which the
resolution of the board of directors declaring such dividend is adopted, as the
case may be, shall be the record date for such determination of shareholders.
When a determination
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<PAGE>
of shareholders entitled to vote at any meeting of shareholders has been made as
provided in this section, such determination shall apply to any adjournment
thereof.
REGISTERED SHAREHOLDERS
Section 6. The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Colorado.
LIST OF SHAREHOLDERS
Section 7. The officer or agent having charge of the transfer books for
shares shall make, at least ten (10) days before each meeting of shareholders, a
complete list of the shareholders entitled to vote at such meting, arranged in
alphabetical order, with the address of each and the number of shares held by
each, which list, for a period of ten (10) days prior to such meeting, shall be
kept on file at the principal office of the corporation and shall be subject to
inspection by any shareholder at any time during usual business hours. Such
list shall also be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any shareholder during the whole time
of the meeting. The original share ledger or transfer book, or a duplicate
thereof, shall be prima facie evidence as to who are the shareholders entitled
to examine such list or share ledger or transfer book or to vote at any meeting
of the shareholders.
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<PAGE>
ARTICLE XI
GENERAL PROVISIONS
DIVIDENDS
Section 1. Subject to the provisions of the articles of incorporation
relating thereto, if any, dividends may be declared by the board of directors at
any regular or special meeting, pursuant to law. Dividends may be paid in cash,
in property or in shares of the capital stock, subject to any provisions of the
articles of incorporation.
Section 2. Before payment of any dividend, there may be set aside out
of any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve fund to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
Section 3. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons as
the board of directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall be fixed by
resolution of the board of directors.
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<PAGE>
SEAL
Section 5. The corporate seal shall have inscribed thereon the name of
the corporation, the year of its organization and the words "Corporate Seal,
Colorado". The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or in any manner reproduced.
ARTICLE XII
AMENDMENTS
Section 1. These by-laws may be altered, amended, or repealed or new
by-laws may be adopted by the affirmative vote of a majority of the board of
directors at any regular or special meeting of the board.
Section 2. These by-laws may be altered, amended or repealed or new
by-laws may be adopted at any regular or special meeting of shareholders at
which a quorum is present or represented, by the affirmative vote of a majority
of the stock entitled to vote, provided notice of the proposed alteration,
amendment or repeal be contained in the notice of such meeting.
-19-
<PAGE>
Exhibit 4.3
<PAGE>
FOURTH AMENDMENT
TO
TERM LOAN AND CREDIT AGREEMENT
THIS FOURTH AMENDMENT OF TERM LOAN AND CREDIT AGREEMENT (the "Fourth
Amendment") is entered into this 23rd day of December, 1997, by and between
Norwest Bank Colorado, National Association (the "Bank") and Rocky Mountain
Chocolate Factory, Inc. (the "Borrower").
RECITALS
I. On April 5, 1996, the Borrower and the Bank entered into a Term Loan
and Credit Agreement (the "Agreement") setting forth the terms and conditions of
a revolving line of credit facility and three term loan credit facilities
extended by the Bank to the Borrower.
II. On February 5, 1997, May 2, 1997, and May 21, 1997, the Bank and the
Borrower entered into additional agreements, each amending specific terms of the
Agreement (the "Amendments").
III. The Bank and the Borrower now wish to modify certain other terms of
the Agreement relating to the Term Loan 1.
NOW, THEREFORE, in consideration of the promises contained herein, the
parties agree as follows:
1. RECITALS. The recitals are incorporated herein.
2. CAPITALIZATION OF TERMS. Unless the context requires otherwise, all
capitalized terms in the Fourth Amendment shall have the same meaning as
ascribed to them in the Agreement and the Amendments.
3. AMENDMENTS. Section 2.2 of the Agreement, as amended if amended, is
deleted and replaced with the following new Section 2.2:
"2.2. TERM LOAN 1.
2.2.1. On the effective date of the Fourth Amendment, the Bank
will renew Term Loan 1 which has an outstanding principal balance of One Million
Five Hundred Eighty Six Thousand Seven Hundred Fifty Three and Seventeen/100
Dollars ($1,586,753.17) and advance to the Borrower the additional principal sum
of Three Hundred Ninety Thousand And No/100 Dollars ($390,000.00) for a renewed
Term Loan 1 in the amount of One Million Nine
<PAGE>
Hundred Seventy Six Thousand Seven Hundred Fifty Three And Seventeen/100 Dollars
($1,976,753.17).
2.2.2. The purpose of the funds newly advanced under Term Loan
1 is to finance the purchase of a 2 acre parcel of property located adjacent to
the Borrower's factory located at 265 Turner Drive, Bodo Industrial Park.
2.2.3. From the effective date of the Fourth Amendment until
April 30, 2001, interest on Term Loan 1 shall be calculated at a fixed annual
rate of 8.25%. From May 1, 2001 until April 30, 2006, interest shall be
calculated at a fixed annual rate equal to the Prime Rate in effect on May 1,
2001. From May 1, 2006 until April 30, 2011, interest shall be calculated at a
fixed annual rate equal to the Prime Rate in effect on May 1, 2006. From May 1,
2011 until the Term Loan 1 Maturity Date, interest shall be calculated at a
fixed rate equal to the Prime Rate in effect on May 1, 2011.
2.2.4. The principal and interest of Term Loan 1 will be
repaid in 219 equal, consecutive, monthly installments, payable on the last day
of each month, commencing January 31, 1998, and continuing on the last day of
each month thereafter, plus one final payment of remaining principal and unpaid
interest, due on the Term Loan 1 Maturity Date. From the effective date of the
Fourth Amendment until April 30, 2001, the payment amount of principal and
interest shall be $17,491.13. Beginning May 1, 2001, and every 60 months
thereafter, the amount of the payment will change if, when, and in accordance
with the interest changes provided in section 2.2.3 above.
4. DEFINITION OF TERM "PROPERTY." The term "property," wherever
appearing throughout the Agreement, Amendments, and Fourth Amendment, and
referring to the real property collateral securing repayment of the Borrower's
loan facilities described therein, shall include all real property in which the
Borrower has granted a deed of trust to Norwest Bank, whether at the time of the
Agreement or at any time subsequent thereto.
5. TECHNICAL CORRECTION. The word "perm" appearing in the second line of
Section 4 of the Third Amendment is correctly the word: "permit."
6. CONDITIONS PRECEDENT. The Bank shall not be obligated to make any
advances hereunder unless:
6.1. The Borrower has executed and delivered all collateral, security,
and loan documentation that the Bank requires to document the transactions
contemplated herein and to obtain a perfected first lien security interest in
the collateral property;
6.2. The appraisal of the collateral property is in form and substance
and prepared by appraisers satisfactory to the Bank;
Amendment to Loan Agreement
2 of 4
<PAGE>
6.3 No Event of Default shall have occurred and be continuing at the
time of the closing of the transactions contemplated herein, and no lawsuit or
litigation against the Borrower has been filed or is about to be filed that may
affect the Borrower's ability to perform under the Agreement Amendments;
6.4. No material adverse change has occurred in the financial
condition of the Borrower;
6.5. All matters related to the closing of the transactions
contemplated herein are in a state satisfactory to the Bank and the bank's
counsel.
7. CROSS-COLLATERALIZATION AND CROSS-DEFAULT. The Borrower reaffirms its
agreement that any collateral serving as security for any one credit or term
loan facility under the Agreement or any Amendment shall also serve as security
for all other credits and term loan facilities extended by the Bank to the
Borrower. An event of default under any one credit or term loan facility
extended by the Bank to the Borrower shall also constitute an event of default
under all other credit or term loan facilities extended by the Bank to the
Borrower.
8. WARRANTIES AND REPRESENTATIONS. The Borrower restates and reaffirms
all warranties and representations made in the Agreement and the Amendments.
9. TERMS NOT AMENDED. All other terms and provisions set forth in the
Agreement and the Amendments not specifically amended herein shall remain in
full force and effect.
10. CONSTRUCTION OF AGREEMENTS. This Fourth Amendment, the Agreement, and
the Amendments shall be read in conjunction with each other so as to give effect
to the transactions and intents contemplated in all documents.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.
Amendment to Loan Agreement
3 of 4
<PAGE>
BANK:
Norwest Bank Colorado, National Association
By:/s/ William Maurer
----------------------------
William Maurer, Vice President
BORROWER:
Rocky Mountain Chocolate Factory, Inc.
By:
---------------------------------------
Name:
------------------------------------
Title:
------------------------------------
By:
---------------------------------------
Name:
------------------------------------
Title:
------------------------------------
Amendment to Loan Agreement
4 of 4
<PAGE>
[LETTERHEAD]
March 9, 1998
Mr. Bryan Merryman
Rocky Mountain Chocolate Factory
265 Turner Dr,
Durango, CO 81301
VIA FAX 970-385-5919 AND FIRST CLASS MAIL
Subject: FIFTH AMENDMENT TO TERM LOAN AND CREDIT AGREEMENT.
Dear Bryan:
Rocky Mountain Chocolate Factory, Inc. ("RMCF") and Norwest Bank Colorado, N.A.
(the "Bank") are parties to a certain Loan Agreement dated April 5, 1996 as
amended four previous times (collectively the "Agreement").
A block of approximately 867,000 shares of RMCF common stock is currently on the
market. RMCF desires to purchase at least $1,000,000 of this block. In order to
facilitate its bid for this stock, RMCF has requested the Bank modify certain
existing covenants of the Agreement (the "Existing Covenants" as described
below). The Bank agrees to this modification (the "Modified Covenants" as
described below) until the earlier of May 31, 1998 or until it has been
determined that RMCF has been unsuccessful in its bid for the stock at which
time the covenants will revert back to the Existing Covenants. The Bank will
consider further extension of the Modified Covenants in conjunction with its
annual review of audited fiscal year-end financial information for RMCF but
makes no commitment to further extend the Modified Covenants at this time.
<TABLE>
<CAPTION>
Existing Modified
-------- --------
<S> <C> <C>
Current Ratio: 1.5 1.3
Working Capital: $2,250,000 $1,500,000
Tangible Net Worth: $9,000,000 $7,700,000
Line Resting Period: 60 Consecutive Days 30 Consecutive Days
</TABLE>
ACCEPTED AND AGREED
BANK
/s/ Bill Maurer
- -------------------------
Bill Maurer, V.P.
RMCF
/s/ Bryan Merryman
- ------------------------
Bryan Merryman, CFO
<PAGE>
[LETTERHEAD]
May 6, 1998
Mr. Bryan Merryman
Rocky Mountain Chocolate Factory
265 Turner Dr,
Durango, CO 81301
VIA FAX 970-385-5919 AND FIRST CLASS MAIL
Subject: SIXTH AMENDMENT TO TERM LOAN AND CREDIT AGREEMENT.
Dear Bryan:
Rocky Mountain Chocolate Factory, Inc. ("RMCF") and Norwest Bank Colorado, N.A.
(the "Bank") are parties to a certain Loan Agreement dated April 5, 1996 as
amended five previous times (collectively the "Agreement").
Pursuant to the Agreement, capital expenditures are not to exceed $1,750,000 per
fiscal year. According to your letter delivered May 4, 1998, capital
expenditures for the fiscal year ending February 28, 1998 were $2,082,000 or
$332,000 over the capital expenditures covenant.
Based on the overall financial performance of RMCF and its compliance with other
terms and conditions of its loan arrangements, the Bank hereby waives compliance
with the capital expenditure covenant for the fiscal year ending February 28,
1998..
ACCEPTED AND AGREED
BANK
/S/ Bill Maurer
- ----------------------
Bill Maurer, V.P.
RMCF
/S/ Bryan Merryman
- ----------------------
Bryan Merryman, CFO
<PAGE>
Exhibit 10.12
<PAGE>
EXHIBIT 10.12
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "Agreement"), made and entered into as
of the __________ day of April, 1998, by and between ROCKY MOUNTAIN CHOCOLATE
FACTORY, INC., a Colorado corporation (the "Corporation"), and ________________
("Director").
W I T N E S S E T H:
WHEREAS, it is essential to the Corporation to retain and attract as
directors the most capable persons available;
WHEREAS, Director is a director of the Corporation;
WHEREAS, both the Corporation and Director recognize the risk of litigation
and other claims being asserted against directors of public companies; and
WHEREAS, in recognition of Director's need for substantial protection
against personal liability in order to maintain continued service to the
Corporation in an effective manner and to provide Director with specific
contractual assurance that the protection will be available to Director, the
Corporation desires to provide in this Agreement for the indemnification of and
the advancement of expenses to Director to the full extent permitted by law, as
set forth in this Agreement;
NOW THEREFORE, in consideration of the premises and mutual agreements
contained herein, including Director's continued service to the Corporation, the
Corporation and Director hereby agree as follows:
Section 1. DEFINITIONS. The following terms, as used herein, shall
have the following respective meanings:
"C.B.C.A." means the Colorado Business Corporation Act, as currently in
effect or as amended from time to time.
"Change In Control" means a change in control of the Corporation after the
date of this Agreement in any one of the following circumstances: (a) there
shall have occurred an event that would be required to be reported in response
to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar
item on any similar schedule or form) promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), whether or not the Corporation is
then subject to such reporting requirement; (b) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act) (an "Acquiring Person")
shall have become the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the
-1-
<PAGE>
Corporation representing 20% or more of the combined voting power of the
Corporation's then outstanding voting securities (a "Share Acquisition"); (c)
the Corporation is a party to a merger, consolidation, sale of assets or
other reorganization, or a proxy contest, as a consequence of which members
of the Board of Directors in office immediately prior to such transaction or
event constitute less than a majority of the Board of Directors thereafter;
or (d) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (including for
this purpose any new director whose election or nomination for election by
the Corporation's stockholders was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of
such period) cease for any reason to constitute at least a majority of the
Board of Directors; PROVIDED, HOWEVER, that an event described in clause (a)
or (b) shall not be deemed a Change In Control if such event is approved,
prior to its occurrence or within 60 days thereafter, by at least two-thirds
of the members of the Board of Directors in office immediately prior to such
occurrence. In addition to the foregoing, a Change In Control shall be
deemed to have occurred if, after the occurrence of a Share Acquisition that
has been approved by a two-thirds vote of the Board as contemplated in the
proviso to the preceding sentence, the Acquiring Person shall have become the
beneficial owner, directly or indirectly, of securities of the Corporation
representing an additional 5% or more of the combined voting power of the
Corporation's then outstanding voting securities (a "Subsequent Share
Acquisition") without the approval prior thereto or within 60 days thereafter
of at least two-thirds of the members of the Board of Directors who were in
office immediately prior to such Subsequent Share Acquisition and were not
appointed, nominated or recommended by, and do not otherwise represent the
interests of, the Acquiring Person on the Board. Each subsequent acquisition
by an Acquiring Person of securities of the Corporation representing an
additional 5% or more of the combined voting power of the Corporation's then
outstanding voting securities shall also constitute a Subsequent Share
Acquisition (and a Change In Control unless approved as contemplated by the
preceding sentence) if the approvals contemplated by this paragraph were
given with respect to the initial Share Acquisition and all prior Subsequent
Share Acquisitions by such Acquiring Person. The Board approvals contemplated
by the two preceding sentences and by the proviso to the first sentence of
this paragraph may contain such conditions as the members of the Board
granting such approval may deem advisable and appropriate, the subsequent
failure or violation of which shall result in the rescission of such approval
and cause a Change In Control to be deemed to have occurred as of the date of
the Share Acquisition or Subsequent Share Acquisition, as the case may be.
Notwithstanding the foregoing, a Change In Control shall not be deemed to
have occurred for purposes of clause (b) of the first sentence of this
paragraph with respect to any Acquiring Person meeting the requirements of
clauses (i) and (ii) of Rule 13d-l(b)(1) promulgated under the Exchange Act.
"Expenses" shall include reasonable attorneys' fees, retainers, court
costs, transcript costs, fees of experts, witness fees, travel expenses,
duplicating costs, printing and binding costs, telephone charges, postage,
delivery service fees, and all other disbursements or expenses of the types
customarily incurred in connection with prosecuting, defending, preparing to
prosecute or defend, investigating or being or preparing to be a witness in a
Proceeding.
"Independent Counsel" means a law firm, or member of a law firm, that is
experienced in matters of corporation law and neither presently is, nor in the
five years previous to his or her
-2-
<PAGE>
selection or appointment has been, retained to represent: (a) the
Corporation or Director in any matter material to either such party, (b) any
other party to the Proceeding giving rise to a claim for indemnification
hereunder or (c) the beneficial owners, directly or indirectly, of securities
of the Corporation representing 5% or more of the combined voting power of
the Corporation's then outstanding voting securities.
"Matter" is a claim, a material issue, or a substantial request for relief.
"Proceeding" includes any threatened, pending or completed action, suit,
arbitration, alternate dispute resolution mechanism, investigation,
administrative hearing or any other proceeding, whether civil, criminal,
administrative or investigative, and whether formal or informal, including
without limitation one initiated by Director pursuant to Section 10 of this
Agreement to enforce his rights under this Agreement.
Section 2. INDEMNIFICATION. The Corporation shall indemnify, and
advance Expenses to, Director to the fullest extent permitted by applicable law
in effect on the date of the effectiveness of this Agreement, and to such
greater extent as applicable law may thereafter permit. The rights of Director
provided under the preceding sentence shall include, but not be limited to, the
right to be indemnified to the fullest extent permitted by Section 7-109-102(4)
and (5) of the C.B.C.A. in Proceedings by or in the right of the Corporation and
to the fullest extent permitted by Section 7-109-102(1)-(3) of the C.B.C.A. in
all other Proceedings. To the fullest extent permitted by applicable law, such
right to be indemnified shall survive and continue following the termination of
Director's service as a director of the Corporation, with respect to conduct and
actions taken, and decisions made, by Director in his capacity as a director of
the Corporation. The provisions set forth below in this Agreement are provided
in furtherance, and not by way of limitation, of the obligations expressed in
this Section 2.
Section 3. EXPENSES RELATED TO PROCEEDINGS. If Director is, by reason
of his status as a director of the Corporation, a witness in or a party to and
is successful, on the merits or otherwise, in any Proceeding, he shall be
indemnified against all Expenses actually and reasonably incurred by him or on
his behalf in connection therewith. If Director is not wholly successful in
such Proceeding but is successful, on the merits or otherwise, as to any Matter
in such Proceeding, the Corporation shall indemnify Director against all
Expenses actually and reasonably incurred by him or on his behalf relating to
each Matter. The termination of any Matter in such a Proceeding by dismissal,
with or without prejudice, shall be deemed to be a successful result as to such
Matter.
Section 4. ADVANCEMENT OF EXPENSES. The Corporation shall pay or
reimburse Director for the Expenses incurred by Director in advance of the final
disposition of a Proceeding within ten days after Director requests such payment
or reimbursement, to the fullest extent permitted by, and subject to compliance
with, Section 7-109-104 of the C.B.C.A.
Section 5. REQUEST FOR INDEMNIFICATION. To obtain indemnification
Director shall submit to the Corporation a written request with such information
as is reasonably available to
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Director. The Secretary of the Corporation shall promptly advise the Board
of Directors of such request.
Section 6. DETERMINING ENTITLEMENT TO INDEMNIFICATION IF NO CHANGE IN
CONTROL. If there has been no Change In Control at the time the request for
Indemnification is sent, Director's entitlement to indemnification shall be
determined in accordance with Section 7-109-106 of the C.B.C.A. If entitlement
to indemnification is to be determined by Independent Counsel, the Corporation
shall furnish notice to Director within ten days after receipt of the request
for indemnification, specifying the identity and address of Independent Counsel.
Director may, within 14 days after receipt of such written notice of selection,
deliver to the Corporation a written objection to such selection. Such
objection may be asserted only on the ground that the Independent Counsel so
selected does not meet the requirements of Independent Counsel and the objection
shall set forth with particularity the factual basis of such assertion. If
there is an objection to the selection of Independent Counsel, either the
Corporation or Director may petition any court of competent jurisdiction for a
determination that the objection is without a reasonable basis and/or for the
appointment of Independent Counsel selected by the court.
Section 7. DETERMINING ENTITLEMENT TO INDEMNIFICATION IF CHANGE IN
CONTROL. If there has been a Change In Control at the time the request for
indemnification is sent, Director's entitlement to indemnification shall be
determined in a written opinion by Independent Counsel selected by Director.
Director shall give the Corporation written notice advising of the identity and
address of the Independent Counsel so selected. The Corporation may, within
seven days after receipt of such written notice of selection, deliver to
Director a written objection to such selection. Director may, within five days
after the receipt of such objection from the Corporation, submit the name of
another Independent Counsel and the Corporation may, within seven days after
receipt of such written notice of selection, deliver to Director a written
objection to such selection. Any objection is subject to the limitations in
Section 6 of this Agreement. Director may petition any court of competent
jurisdiction for a determination that the Corporation's objection to the first
and/or second selection of Independent Counsel is without a reasonable basis
and/or for the appointment as Independent Counsel of a person selected by the
court.
Section 8. PROCEDURES OF INDEPENDENT COUNSEL. If there has been a
Change In Control before the time the request for indemnification is sent by
Director, Director shall be presumed (except as otherwise expressly provided in
this Agreement) to be entitled to indemnification upon submission of a request
for indemnification in accordance with Section 5 of this Agreement, and
thereafter the Corporation shall have the burden of proof to overcome the
presumption in reaching a determination contrary to the presumption. The
presumption shall be used by Independent Counsel as a basis for a determination
of entitlement to indemnification unless the Corporation provides information
sufficient to overcome such presumption by clear and convincing evidence or the
investigation, review and analysis of Independent Counsel convinces him or her
by clear and convincing evidence that the presumption should not apply.
Except in the event that the determination of entitlement to
indemnification is to be made by Independent Counsel, if the person or persons
empowered under Section 6 or 7 of this
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Agreement to determine entitlement to indemnification shall not have made and
furnished to Director in writing a determination within 60 days after receipt
by the Corporation of the request therefor, the requisite determination of
entitlement to indemnification shall be deemed to have been made and Director
shall be entitled to such indemnification unless Director knowingly
misrepresented a material fact in connection with the request for
indemnification or such indemnification is prohibited by law. The
termination of any Proceeding or of any Matter therein, by judgment, order,
settlement or conviction, or upon a plea of NOLO CONTENDERE or its
equivalent, shall not (except as otherwise expressly provided in this
Agreement) of itself adversely affect the right of Director to
indemnification or create a presumption that (a) Director did not act in good
faith and in a manner that he reasonably believed, in the case of conduct in
his official capacity as a director of the Corporation, to be in the best
interests of the Corporation or in all other cases that his conduct was at
least not opposed to the Corporation's best interests, or (b) with respect to
any criminal Proceeding, that Director had reasonable cause to believe that
his conduct was unlawful.
Section 9. EXPENSES OF INDEPENDENT COUNSEL. The Corporation shall pay
any and all reasonable fees and expenses of Independent Counsel incurred acting
pursuant to this Agreement and in any proceeding to which it is a party or
witness in respect of its investigation and written report and shall pay all
reasonable fees and expenses incident to the procedures in which such
Independent Counsel was selected or appointed. No Independent Counsel may serve
if a timely objection has been made to his or her selection until a court has
determined that such objection is without a reasonable basis.
Section 10. TRIAL DE NOVO. In the event that (a) a determination is
made pursuant to Section 6 or 7 of this Agreement that Director is not entitled
to indemnification under this Agreement, (b) advancement of Expenses is not
timely made pursuant to Section 4 of this Agreement, (c) Independent Counsel has
not made and delivered a written opinion determining the request for
indemnification (i) within 90 days after being appointed by a court, (ii) within
90 days after objections to his or her selection have been overruled by a court
or (iii) within 90 days after the time for the Corporation or Director to object
to his or her selection or (d) payment of indemnification is not made within
five days after a determination of entitlement to indemnification has been made
or deemed to have been made pursuant to Section 6, 7 or 8 of this Agreement,
Director shall be entitled to an adjudication in any court of competent
jurisdiction of his entitlement to such indemnification or advancement of
Expenses. In the event that a determination shall have been made that Director
is not entitled to indemnification, any judicial proceeding (including any
arbitration) commenced pursuant to this Section 10 shall be conducted in all
respects as a DE NOVO trial on the merits, and Director shall not be prejudiced
by reasons of that adverse determination. If a Change In Control shall have
occurred, in any judicial proceeding commenced pursuant to this Section 10, the
Corporation shall have the burden of proving that Director is not entitled to
indemnification or advancement of Expenses, as the case may be. If a
determination shall have been made or deemed to have been made that Director is
entitled to indemnification, the Corporation shall be bound by such
determination in any judicial proceeding commenced pursuant to this Section 10,
or otherwise, unless Director knowingly misrepresented
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a material fact in connection with the request for indemnification, or such
indemnification is prohibited by law.
The Corporation shall be precluded from asserting in any judicial
proceeding commenced pursuant to this Section 10 that the procedures and
presumptions of this Agreement are not valid, binding and enforceable and shall
stipulate in any such court that the Corporation is bound by all provisions of
this Agreement. In the event that Director, pursuant to this Section 10, seeks
a judicial adjudication to enforce his rights under, or to recover damages for
breach of, this Agreement, Director shall be entitled to recover from the
Corporation, and shall be indemnified by the Corporation against, any and all
Expenses actually and reasonably incurred by him in such judicial adjudication,
but only if he prevails therein. If it shall be determined in such judicial
adjudication that Director is entitled to receive part but not all of the
indemnification or advancement of Expenses sought, the Expenses incurred by
Director in connection with such judicial adjudication shall nevertheless be
paid by the Corporation.
Section 11. NON-EXCLUSIVITY. The rights of indemnification and to
receive advancement of Expenses as provided by this Agreement shall not be
deemed exclusive of any other rights to which Director may at any time be
entitled under applicable law, the Certificate of Incorporation, Bylaws, a vote
of stockholders, a resolution of the Board of Directors or otherwise. No
amendment or modification of this Agreement or any provision hereof shall be
effective as to Director for acts, events and circumstances that occurred, in
whole or in part, before such amendment or modification. The provisions of this
Agreement shall continue as to Director notwithstanding any termination of his
status as a director of the Corporation and shall inure to the benefit of his
heirs, executors and administrators.
Section 12. INSURANCE AND SUBROGATION. To the extent the Corporation
maintains an insurance policy or policies providing liability insurance for
directors or officers of the Corporation or of any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
which such person serves at the request of the Corporation, Director shall be
covered by such policy or policies in accordance with its or their terms to the
maximum extent of coverage available for any such director or officer under such
policy or policies.
In the event of any payment hereunder, the Corporation shall be subrogated
to the extent of such payment to all the rights of recovery of Director, who
shall execute all papers required and take all action necessary to secure such
rights, including execution of such documents as are necessary to enable the
Corporation to bring suit to enforce such rights.
The Corporation shall not be liable under this Agreement to make any
payment of amounts otherwise indemnifiable hereunder if, and to the extent that,
Director has otherwise actually received such payment under any insurance
policy, contract, agreement or otherwise.
Section 13. SEVERABILITY. If any provision or provisions of this
Agreement shall be held to be invalid, illegal or unenforceable for any reason
whatsoever, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby;
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and, to the fullest extent possible, the provisions of this Agreement shall
be construed so as to give effect to the intent manifested by the provision
held invalid, illegal or unenforceable.
Section 14. CIRCUMSTANCES WHEN DIRECTOR IS NOT ENTITLED TO
INDEMNIFICATION. Director shall not be entitled to indemnification or
advancement of Expenses under this Agreement with respect to any Proceeding, or
any Matter therein, brought or made by Director against the Corporation, other
than a Proceeding, or Matter therein, brought by Director to enforce his rights
under this Agreement and in which Director is successful, in whole or in part.
Section 15. NOTICES. Any communication required or permitted to the
Corporation shall be addressed to the Secretary of the Corporation and any such
communication to Director shall be given in writing by depositing the same in
the United States mail, with postage thereon prepaid, addressed to the person to
whom such notice is directed at the address of such person on the records of the
Corporation, and such notice shall be deemed given at the time when the same
shall be so deposited in the United States mail.
Section 16. CHOICE OF LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF COLORADO,
WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES THEREOF.
Section 17. CONSENT TO JURISDICTION. THE CORPORATION AND DIRECTOR EACH
HEREBY IRREVOCABLY CONSENT TO THE JURISDICTION OF THE COURTS OF THE STATE OF
COLORADO FOR ALL PURPOSES IN CONNECTION WITH ANY ACTION OR PROCEEDING WHICH
ARISES OUT OF OR RELATES TO THIS AGREEMENT AND AGREE THAT ANY ACTION INSTITUTED
UNDER THIS AGREEMENT SHALL BE BROUGHT ONLY IN THE STATE COURTS OF THE STATE OF
COLORADO.
Section 18. AMENDMENT. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless made in a writing
signed by each of the parties hereto.
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IN WITNESS WHEREOF, the Corporation and Director have executed this
Agreement as of the day and year first above written.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
By:_____________________________________
Franklin E. Crail
President and Chief Executive Officer
________________________________________
____________________ (Director)
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Schedule to Form of
Directors' Indemnification Agreement
The Registrant has entered into an Indemnification Agreement in the
foregoing form with each of its current directors, as follows:
Franklin E. Crail
Gary S. Hauer
Gerald A. Kien
Lee N. Mortenson
Everett A. Sisson
Fred M. Trainor
<PAGE>
Exhibit 10.13
<PAGE>
EXHIBIT 10.13
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "Agreement"), made and entered into as
of the _________ day of April, 1998, by and between ROCKY MOUNTAIN CHOCOLATE
FACTORY, INC., a Colorado corporation (the "Corporation"), and ________________
("Officer").
W I T N E S S E T H:
WHEREAS, it is essential to the Corporation to retain and attract as
officers the most capable persons available;
WHEREAS, Officer is an officer of the Corporation;
WHEREAS, both the Corporation and Officer recognize the risk of litigation
and other claims being asserted against officers of public companies; and
WHEREAS, in recognition of Officer's need for substantial protection
against personal liability in order to maintain continued service to the
Corporation in an effective manner and to provide Officer with specific
contractual assurance that the protection will be available to Officer, the
Corporation desires to provide in this Agreement for the indemnification of and
the advancement of expenses to Officer to the full extent permitted by law, as
set forth in this Agreement;
NOW THEREFORE, in consideration of the premises and mutual agreements
contained herein, including Officer's continued service to the Corporation, the
Corporation and Officer hereby agree as follows:
Section 1. DEFINITIONS. The following terms, as used herein, shall
have the following respective meanings:
"C.B.C.A." means the Colorado Business Corporation Act, as currently in
effect or as amended from time to time.
"Change In Control" means a change in control of the Corporation after the
date of this Agreement in any one of the following circumstances: (a) there
shall have occurred an event that would be required to be reported in response
to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar
item on any similar schedule or form) promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), whether or not the Corporation is
then subject to such reporting requirement; (b) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act) (an "Acquiring Person")
shall have become the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the
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Corporation representing 20% or more of the combined voting power of the
Corporation's then outstanding voting securities (a "Share Acquisition"); (c)
the Corporation is a party to a merger, consolidation, sale of assets or
other reorganization, or a proxy contest, as a consequence of which members
of the Board of Directors in office immediately prior to such transaction or
event constitute less than a majority of the Board of Directors thereafter;
or (d) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (including for
this purpose any new director whose election or nomination for election by
the Corporation's stockholders was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of
such period) cease for any reason to constitute at least a majority of the
Board of Directors; PROVIDED, HOWEVER, that an event described in clause (a)
or (b) shall not be deemed a Change In Control if such event is approved,
prior to its occurrence or within 60 days thereafter, by at least two-thirds
of the members of the Board of Directors in office immediately prior to such
occurrence. In addition to the foregoing, a Change In Control shall be
deemed to have occurred if, after the occurrence of a Share Acquisition that
has been approved by a two-thirds vote of the Board as contemplated in the
proviso to the preceding sentence, the Acquiring Person shall have become the
beneficial owner, directly or indirectly, of securities of the Corporation
representing an additional 5% or more of the combined voting power of the
Corporation's then outstanding voting securities (a "Subsequent Share
Acquisition") without the approval prior thereto or within 60 days thereafter
of at least two-thirds of the members of the Board of Directors who were in
office immediately prior to such Subsequent Share Acquisition and were not
appointed, nominated or recommended by, and do not otherwise represent the
interests of, the Acquiring Person on the Board. Each subsequent acquisition
by an Acquiring Person of securities of the Corporation representing an
additional 5% or more of the combined voting power of the Corporation's then
outstanding voting securities shall also constitute a Subsequent Share
Acquisition (and a Change In Control unless approved as contemplated by the
preceding sentence) if the approvals contemplated by this paragraph were
given with respect to the initial Share Acquisition and all prior Subsequent
Share Acquisitions by such Acquiring Person. The Board approvals contemplated
by the two preceding sentences and by the proviso to the first sentence of
this paragraph may contain such conditions as the members of the Board
granting such approval may deem advisable and appropriate, the subsequent
failure or violation of which shall result in the rescission of such approval
and cause a Change In Control to be deemed to have occurred as of the date of
the Share Acquisition or Subsequent Share Acquisition, as the case may be.
Notwithstanding the foregoing, a Change In Control shall not be deemed to
have occurred for purposes of clause (b) of the first sentence of this
paragraph with respect to any Acquiring Person meeting the requirements of
clauses (i) and (ii) of Rule 13d-l(b)(1) promulgated under the Exchange Act.
"Expenses" shall include reasonable attorneys' fees, retainers, court
costs, transcript costs, fees of experts, witness fees, travel expenses,
duplicating costs, printing and binding costs, telephone charges, postage,
delivery service fees, and all other disbursements or expenses of the types
customarily incurred in connection with prosecuting, defending, preparing to
prosecute or defend, investigating or being or preparing to be a witness in a
Proceeding.
"Independent Counsel" means a law firm, or member of a law firm, that is
experienced in matters of corporation law and neither presently is, nor in the
five years previous to his or her
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selection or appointment has been, retained to represent: (a) the
Corporation or Officer in any matter material to either such party, (b) any
other party to the Proceeding giving rise to a claim for indemnification
hereunder or (c) the beneficial owners, directly or indirectly, of securities
of the Corporation representing 5% or more of the combined voting power of
the Corporation's then outstanding voting securities.
"Matter" is a claim, a material issue, or a substantial request for relief.
"Proceeding" includes any threatened, pending or completed action, suit,
arbitration, alternate dispute resolution mechanism, investigation,
administrative hearing or any other proceeding, whether civil, criminal,
administrative or investigative, and whether formal or informal, including
without limitation one initiated by Officer pursuant to Section 10 of this
Agreement to enforce his rights under this Agreement.
Section 2. INDEMNIFICATION. The Corporation shall indemnify, and
advance Expenses to, Officer to the fullest extent permitted by applicable law
in effect on the date of the effectiveness of this Agreement, and to such
greater extent as applicable law may thereafter permit. The rights of Officer
provided under the preceding sentence shall include, but not be limited to, the
right to be indemnified to the fullest extent permitted by Section 7-109-102(4)
and (5) of the C.B.C.A. in Proceedings by or in the right of the Corporation and
to the fullest extent permitted by Section 7-109-102(1)-(3) of the C.B.C.A. in
all other Proceedings, in each case as permitted by Section 7-109-107(b) of the
C.B.C.A. To the fullest extent permitted by applicable law, such right to be
indemnified shall survive and continue following the termination of Officer's
service as an officer of the Corporation, with respect to conduct and actions
taken, and decisions made, by Officer in his capacity as an officer of the
Corporation. The provisions set forth below in this Agreement are provided in
furtherance, and not by way of limitation, of the obligations expressed in this
Section 2.
Section 3. EXPENSES RELATED TO PROCEEDINGS. If Officer is, by reason
of his status as an officer of the Corporation, a witness in or a party to and
is successful, on the merits or otherwise, in any Proceeding, he shall be
indemnified against all Expenses actually and reasonably incurred by him or on
his behalf in connection therewith. If Officer is not wholly successful in such
Proceeding but is successful, on the merits or otherwise, as to any Matter in
such Proceeding, the Corporation shall indemnify Officer against all Expenses
actually and reasonably incurred by him or on his behalf relating to each
Matter. The termination of any Matter in such a Proceeding by dismissal, with
or without prejudice, shall be deemed to be a successful result as to such
Matter.
Section 4. ADVANCEMENT OF EXPENSES. The Corporation shall pay or
reimburse Officer for the Expenses incurred by Officer in advance of the final
disposition of a Proceeding within ten days after Officer requests such payment
or reimbursement, to the fullest extent permitted by, and subject to compliance
with, Sections 7-109-104 and 7-109-107(b) of the C.B.C.A.
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Section 5. REQUEST FOR INDEMNIFICATION. To obtain indemnification
Officer shall submit to the Corporation a written request with such information
as is reasonably available to Officer. The Secretary of the Corporation shall
promptly advise the Board of Directors of such request.
Section 6. DETERMINING ENTITLEMENT TO INDEMNIFICATION IF NO CHANGE IN
CONTROL. If there has been no Change In Control at the time the request for
Indemnification is sent, Officer's entitlement to indemnification shall be
determined in accordance with Sections 7-109-106 and 7-109-107(b) of the
C.B.C.A. If entitlement to indemnification is to be determined by Independent
Counsel, the Corporation shall furnish notice to Officer within ten days after
receipt of the request for indemnification, specifying the identity and address
of Independent Counsel. Officer may, within 14 days after receipt of such
written notice of selection, deliver to the Corporation a written objection to
such selection. Such objection may be asserted only on the ground that the
Independent Counsel so selected does not meet the requirements of Independent
Counsel and the objection shall set forth with particularity the factual basis
of such assertion. If there is an objection to the selection of Independent
Counsel, either the Corporation or Officer may petition any court of competent
jurisdiction for a determination that the objection is without a reasonable
basis and/or for the appointment of Independent Counsel selected by the court.
Section 7. DETERMINING ENTITLEMENT TO INDEMNIFICATION IF CHANGE IN
CONTROL. If there has been a Change In Control at the time the request for
indemnification is sent, Officer's entitlement to indemnification shall be
determined in a written opinion by Independent Counsel selected by Officer.
Officer shall give the Corporation written notice advising of the identity and
address of the Independent Counsel so selected. The Corporation may, within
seven days after receipt of such written notice of selection, deliver to Officer
a written objection to such selection. Officer may, within five days after the
receipt of such objection from the Corporation, submit the name of another
Independent Counsel and the Corporation may, within seven days after receipt of
such written notice of selection, deliver to Officer a written objection to such
selection. Any objection is subject to the limitations in Section 6 of this
Agreement. Officer may petition any court of competent jurisdiction for a
determination that the Corporation's objection to the first and/or second
selection of Independent Counsel is without a reasonable basis and/or for the
appointment as Independent Counsel of a person selected by the court.
Section 8. PROCEDURES OF INDEPENDENT COUNSEL. If there has been a
Change In Control before the time the request for indemnification is sent by
Officer, Officer shall be presumed (except as otherwise expressly provided in
this Agreement) to be entitled to indemnification upon submission of a request
for indemnification in accordance with Section 5 of this Agreement, and
thereafter the Corporation shall have the burden of proof to overcome the
presumption in reaching a determination contrary to the presumption. The
presumption shall be used by Independent Counsel as a basis for a determination
of entitlement to indemnification unless the Corporation provides information
sufficient to overcome such presumption by clear and convincing evidence or the
investigation, review and analysis of Independent Counsel convinces him or her
by clear and convincing evidence that the presumption should not apply.
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Except in the event that the determination of entitlement to
indemnification is to be made by Independent Counsel, if the person or persons
empowered under Section 6 or 7 of this Agreement to determine entitlement to
indemnification shall not have made and furnished to Officer in writing a
determination within 60 days after receipt by the Corporation of the request
therefor, the requisite determination of entitlement to indemnification shall be
deemed to have been made and Officer shall be entitled to such indemnification
unless Officer knowingly misrepresented a material fact in connection with the
request for indemnification or such indemnification is prohibited by law. The
termination of any Proceeding or of any Matter therein, by judgment, order,
settlement or conviction, or upon a plea of NOLO CONTENDERE or its equivalent,
shall not (except as otherwise expressly provided in this Agreement) of itself
adversely affect the right of Officer to indemnification or create a presumption
that (a) Officer did not act in good faith and in a manner that he reasonably
believed, in the case of conduct in his official capacity as an officer of the
Corporation, to be in the best interests of the Corporation or in all other
cases that his conduct was at least not opposed to the Corporation's best
interests, or (b) with respect to any criminal Proceeding, that Officer had
reasonable cause to believe that his conduct was unlawful.
Section 9. EXPENSES OF INDEPENDENT COUNSEL. The Corporation shall pay
any and all reasonable fees and expenses of Independent Counsel incurred acting
pursuant to this Agreement and in any proceeding to which it is a party or
witness in respect of its investigation and written report and shall pay all
reasonable fees and expenses incident to the procedures in which such
Independent Counsel was selected or appointed. No Independent Counsel may serve
if a timely objection has been made to his or her selection until a court has
determined that such objection is without a reasonable basis.
Section 10. TRIAL DE NOVO. In the event that (a) a determination is
made pursuant to Section 6 or 7 of this Agreement that Officer is not entitled
to indemnification under this Agreement, (b) advancement of Expenses is not
timely made pursuant to Section 4 of this Agreement, (c) Independent Counsel has
not made and delivered a written opinion determining the request for
indemnification (i) within 90 days after being appointed by a court, (ii) within
90 days after objections to his or her selection have been overruled by a court
or (iii) within 90 days after the time for the Corporation or Officer to object
to his or her selection or (d) payment of indemnification is not made within
five days after a determination of entitlement to indemnification has been made
or deemed to have been made pursuant to Section 6, 7 or 8 of this Agreement,
Officer shall be entitled to an adjudication in any court of competent
jurisdiction of his entitlement to such indemnification or advancement of
Expenses. In the event that a determination shall have been made that Officer
is not entitled to indemnification, any judicial proceeding (including any
arbitration) commenced pursuant to this Section 10 shall be conducted in all
respects as a DE NOVO trial on the merits, and Officer shall not be prejudiced
by reasons of that adverse determination. If a Change In Control shall have
occurred, in any judicial proceeding commenced pursuant to this Section 10, the
Corporation shall have the burden of proving that Officer is not entitled to
indemnification or advancement of Expenses, as the case may be. If a
determination shall have been made or deemed to have been made that Officer is
entitled to indemnification, the Corporation shall be bound by such
determination in any judicial proceeding commenced pursuant
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to this Section 10, or otherwise, unless Officer knowingly misrepresented a
material fact in connection with the request for indemnification, or such
indemnification is prohibited by law.
The Corporation shall be precluded from asserting in any judicial
proceeding commenced pursuant to this Section 10 that the procedures and
presumptions of this Agreement are not valid, binding and enforceable and shall
stipulate in any such court that the Corporation is bound by all provisions of
this Agreement. In the event that Officer, pursuant to this Section 10, seeks a
judicial adjudication to enforce his rights under, or to recover damages for
breach of, this Agreement, Officer shall be entitled to recover from the
Corporation, and shall be indemnified by the Corporation against, any and all
Expenses actually and reasonably incurred by him in such judicial adjudication,
but only if he prevails therein. If it shall be determined in such judicial
adjudication that Officer is entitled to receive part but not all of the
indemnification or advancement of Expenses sought, the Expenses incurred by
Officer in connection with such judicial adjudication shall nevertheless be paid
by the Corporation.
Section 11. NON-EXCLUSIVITY. The rights of indemnification and to
receive advancement of Expenses as provided by this Agreement shall not be
deemed exclusive of any other rights to which Officer may at any time be
entitled under applicable law, the Certificate of Incorporation, Bylaws, a vote
of stockholders, a resolution of the Board of Directors or otherwise. No
amendment or modification of this Agreement or any provision hereof shall be
effective as to Officer for acts, events and circumstances that occurred, in
whole or in part, before such amendment or modification. The provisions of this
Agreement shall continue as to Officer notwithstanding any termination of his
status as an officer of the Corporation and shall inure to the benefit of his
heirs, executors and administrators.
Section 12. INSURANCE AND SUBROGATION. To the extent the Corporation
maintains an insurance policy or policies providing liability insurance for
directors or officers of the Corporation or of any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
which such person serves at the request of the Corporation, Officer shall be
covered by such policy or policies in accordance with its or their terms to the
maximum extent of coverage available for any such director or officer under such
policy or policies.
In the event of any payment hereunder, the Corporation shall be subrogated
to the extent of such payment to all the rights of recovery of Officer, who
shall execute all papers required and take all action necessary to secure such
rights, including execution of such documents as are necessary to enable the
Corporation to bring suit to enforce such rights.
The Corporation shall not be liable under this Agreement to make any
payment of amounts otherwise indemnifiable hereunder if, and to the extent that,
Officer has otherwise actually received such payment under any insurance policy,
contract, agreement or otherwise.
Section 13. SEVERABILITY. If any provision or provisions of this
Agreement shall be held to be invalid, illegal or unenforceable for any reason
whatsoever, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby;
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<PAGE>
and, to the fullest extent possible, the provisions of this Agreement shall
be construed so as to give effect to the intent manifested by the provision
held invalid, illegal or unenforceable.
Section 14. CIRCUMSTANCES WHEN OFFICER IS NOT ENTITLED TO
INDEMNIFICATION. Officer shall not be entitled to indemnification or
advancement of Expenses under this Agreement with respect to any Proceeding, or
any Matter therein, brought or made by Officer against the Corporation, other
than a Proceeding, or Matter therein, brought by Officer to enforce his rights
under this Agreement and in which Officer is successful, in whole or in part.
Section 15. NOTICES. Any communication required or permitted to the
Corporation shall be addressed to the Secretary of the Corporation and any such
communication to Officer shall be given in writing by depositing the same in the
United States mail, with postage thereon prepaid, addressed to the person to
whom such notice is directed at the address of such person on the records of the
Corporation, and such notice shall be deemed given at the time when the same
shall be so deposited in the United States mail.
Section 16. CHOICE OF LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF COLORADO,
WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES THEREOF.
Section 17. CONSENT TO JURISDICTION. THE CORPORATION AND OFFICER EACH
HEREBY IRREVOCABLY CONSENT TO THE JURISDICTION OF THE COURTS OF THE STATE OF
COLORADO FOR ALL PURPOSES IN CONNECTION WITH ANY ACTION OR PROCEEDING WHICH
ARISES OUT OF OR RELATES TO THIS AGREEMENT AND AGREE THAT ANY ACTION INSTITUTED
UNDER THIS AGREEMENT SHALL BE BROUGHT ONLY IN THE STATE COURTS OF THE STATE OF
COLORADO.
Section 18. AMENDMENT. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless made in a writing
signed by each of the parties hereto.
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<PAGE>
IN WITNESS WHEREOF, the Corporation and Officer have executed this
Agreement as of the day and year first above written.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
By:_____________________________________
Franklin E. Crail
President and Chief Executive Officer
________________________________________
______________________ (Officer)
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<PAGE>
Schedule to Form of
Officers' Indemnification Agreement
The Registrant has entered into an Indemnification Agreement in the
foregoing form with each of its current officers, as follows:
Franklin E. Crail
Edward L. Dudley
Clifton W. Folsom
Gary S. Hauer
Jay B. Haws
Bryan J. Merryman
<PAGE>
Exhibit 10.14
<PAGE>
EXHIBIT 10.14
PROMISSORY NOTE
$39,999 Dallas, Texas May 15, 1998
FOR VALUE RECEIVED, the undersigned, ________________, hereby promises
to pay to the order of Rocky Mountain Chocolate Factory, Inc., a Colorado
corporation ("Lender"), the principal sum of Thirty-Nine Thousand Nine
Hundred Ninety-nine Dollars ($39,999), with interest on the unpaid balance
thereof from the date hereof until maturity at the rate of seven and one-half
percent (7 1/2%) per annum, both principal and interest payable as
hereinafter provided in lawful money of the United States of America at 265
Turner Drive, Durango, Colorado, or at such other place as from time to time
may be designated by the holder of this Note.
All past due principal and/or interest (to the extent permitted by law)
shall bear interest at the highest rate for which the undersigned may legally
contract under applicable law or, if no such rate is designated under applicable
law, at the rate of eighteen (18%) per annum.
Interest on the unpaid principal balance of this Note shall be due and
payable annually as it accrues on the 15th day of each May beginning May 15,
1999, and continuing regularly thereafter until May 15, 2003, on which date all
unpaid principal of and accrued interest on this Note shall be due and payable.
All funds advanced hereunder shall be used by the undersigned to purchase
8,000 shares of the common stock of Rocky Mountain Chocolate Factory, Inc. No
funds advanced hereunder shall be used for personal, family or household
purposes.
This Note is secured by a Stock Pledge Agreement (the "Pledge Agreement")
of even date herewith from the undersigned to Lender evidencing a security
interest in certain personal property described therein. Upon the failure to pay
any installment of the principal of or interest on this Note as above promised,
or upon the occurrence of an "Event of Default" under the Pledge Agreement, the
holder of this Note or any part thereof shall have the option of declaring the
principal balance hereof and the interest accrued hereon to be immediately due
and payable.
The undersigned shall have the right to prepay, without penalty, at any
time and from time to time prior to maturity, all or any part of the unpaid
principal balance of this Note and/or all or any part of the unpaid interest
accrued to the date of such prepayment, provided that any such principal thus
paid is accompanied by accrued interest on such principal.
It is the intent of the payee of this Note and the undersigned in the
execution of this Note and all other instruments now or hereafter securing this
Note to contract in strict compliance with applicable usury law. In furtherance
thereof, the said payee and the undersigned
<PAGE>
stipulate and agree that none of the terms and provisions contained in this
Note, or in any other instrument executed in connection herewith, shall ever
be construed to create a contract to pay for the use, forbearance or
detention of money, interest at a rate in excess of the maximum interest rate
permitted to be charged by applicable law; that neither the undersigned nor
any guarantors, endorsers or other parties now or hereafter becoming liable
for payment of this Note shall ever be obligated or required to pay interest
on this Note at a rate in excess of the maximum interest that may be lawfully
charged under applicable law; and that the provisions of this paragraph shall
control over all other provisions of this Note and any other instruments now
or hereafter executed in connection herewith which may be in apparent
conflict herewith. The holder of this Note expressly disavows any intention
to charge or collect excessive unearned interest or finance charges in the
event the maturity of this Note is accelerated. If the maturity of this Note
shall be accelerated for any reason or if the principal of this Note is paid
prior to the end of the term of this Note, and as a result thereof the
interest received for the actual period of existence of the loan evidenced by
this Note exceeds the maximum rate permitted to be charged by applicable law,
the holder of this Note shall, at its option, either refund to the
undersigned the amount of such excess or credit the amount of such excess
against the principal balance of this Note then outstanding and thereby shall
render inapplicable any and all penalties of any kind provided by applicable
law as a result of such excess interest. In the event that the said payee or
any other holder of this Note shall contract for, charge or receive any
amount or amounts and/or any other thing of value which are determined to
constitute interest which would increase the effective interest rate on this
Note to a rate in excess of that permitted to be charged by applicable law,
an amount equal to interest in excess of the lawful rate shall, upon such
determination, at the option of the holder of this Note, be either
immediately returned to the undersigned or credited against the principal
balance of this Note then outstanding, in which event any and all penalties
of any kind under applicable law as a result of such excess interest shall be
inapplicable. By execution of this Note the undersigned acknowledges that it
believes the loan evidenced by this Note to be non-usurious and agrees that
if, at any time, the undersigned should have reason to believe that such loan
is in fact usurious, it will give the holder of this Note notice of such
condition and the undersigned agrees that said holder shall have ninety (90)
days in which to make appropriate refund or other adjustment in order to
correct such condition if in fact such exists. The term "applicable law" as
used in this Note shall mean the laws of the State of Colorado, as such laws
now exist or may be changed or amended or come into effect in the future.
Should the indebtedness represented by this Note or any part thereof be
collected at law or in equity or through any bankruptcy, receivership, probate
or other court proceedings or if this Note is placed in the hands of attorneys
for collection after default, the undersigned and all endorsers, guarantors and
sureties of this Note jointly and severally agree to pay to the holder of this
Note in addition to the principal and interest due and payable hereon all the
costs and expenses of said holder in enforcing this Note including, without
limitation, reasonable attorneys' fees and legal expenses.
The undersigned and all endorsers, guarantors and sureties of this Note and
all other persons liable or to become liable on this Note severally waive
presentment for payment, demand, notice of demand and of dishonor and nonpayment
of this Note, notice of intention to accelerate the maturity of this Note,
protest and notice of protest, diligence in collecting, and
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<PAGE>
the bringing of suit against any other party, and agree to all renewals,
extensions, modifications, partial payments, releases or substitutions of
security, in whole or in part, with or without notice, before or after
maturity.
THIS NOTE AND THE RIGHTS AND DUTIES OF THE PARTIES HEREUNDER SHALL BE
GOVERNED FOR ALL PURPOSES BY THE LAW OF THE STATE OF COLORADO AND THE LAW OF THE
UNITED STATES APPLICABLE TO TRANSACTIONS WITHIN SUCH STATE.
______________________________________
[_____________________]
3
<PAGE>
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT (this "Agreement") is made as of May 15, 1998,
by _______________________, an individual residing in the State of Colorado
(herein called "Debtor"), in favor of Rocky Mountain Chocolate Factory, Inc., a
Colorado corporation (herein called "Secured Party").
RECITALS:
1. Debtor has executed in favor of Secured Party that certain promissory
note of even date herewith, payable to the order of Secured Party in the
original principal amount of $39,999 (such promissory note, as from time to time
amended, and all promissory notes given in substitution, renewal or extension
therefor or thereof, in whole or in part, being herein collectively called the
"Note").
2. It is a condition to Secured Party's obligation to advance funds
pursuant to the Note that Debtor shall execute and deliver this Agreement to
Secured Party.
NOW, THEREFORE, in consideration of the premises, of the benefits which
will inure to Debtor from Secured Party's extensions of credit under the Note,
and of Ten Dollars and other good and valuable consideration, the receipt and
sufficiency of all of which are hereby acknowledged, and in order to induce
Secured Party to extend credit under the Note, Debtor hereby agrees with Secured
Party as follows:
AGREEMENTS
ARTICLE I -- DEFINITIONS AND REFERENCES
Section 1.1. GENERAL DEFINITIONS. As used herein, the terms "Agreement",
"Debtor", "Secured Party" and "Note" shall have the meanings indicated above,
and the following terms shall have the following meanings:
"COLLATERAL" means all property, of whatever type, which is described in
Section 2.1 as being at any time subject to a security interest granted
hereunder to Secured Party.
"EVENT OF DEFAULT" means the occurrence of any of the following: failure
by Debtor to pay the Note in accordance with its terms (whether as a result of
acceleration or otherwise); failure by Debtor to perform any act or duty
required by this Agreement; any warranty or representation in this Agreement
proves to have been untrue in any material respect when made; Debtor makes a
general assignment for the benefit of creditors, allows the entry against him of
a judgment, decree or order for relief by a court in an involuntary case
commenced under any bankruptcy or insolvency law, or commences a voluntary case
under any applicable bankruptcy or insolvency law; the death or incapacity of
Debtor; or Debtor ceases to be an employee, officer or director of Secured
Party.
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"ISSUER" means Rocky Mountain Chocolate Factory, Inc.
"OTHER LIABLE PARTY" means any Person, other than Debtor who may now or may
at any time hereafter be primarily or secondarily liable for any of the Secured
Obligations or who may now or may at any time hereafter have granted to Secured
Party a Lien upon any property as security for the Secured Obligations.
"PLEDGED SHARES" has the meaning given it in Section 2.1(a).
"SECURED OBLIGATIONS" shall have the meaning given it in Section 2.2.
"UCC" means the Uniform Commercial Code in effect in the State of Colorado
on the date hereof.
Section 1.2 INCORPORATION OF DEFINITIONS; ATTACHMENTS. All terms used in
this Agreement which are defined in the UCC and not otherwise defined herein
shall have the meanings set forth therein. All exhibits or schedules which may
be attached to this Agreement are a part hereof for all purposes.
Section 1.3. AMENDMENT OF DEFINED INSTRUMENTS. Unless the context
otherwise requires or unless otherwise provided herein, references in this
Agreement to a particular agreement, instrument or document (including, but not
limited to, references in Section 2.1) also refer to and include all renewals,
extensions, amendments, modifications, supplements or restatements of any such
agreement, instrument or document, provided that nothing contained in this
Section shall be construed to authorize any Person to execute or enter into any
such renewal, extension, amendment, modification, supplement or restatement.
Section 1.4. REFERENCES AND TITLES. All references in this Agreement to
Exhibits, Articles, Sections, subsections, and other subdivisions refer to the
Exhibits, Articles, Sections, subsections and other subdivisions of this
Agreement unless expressly provided otherwise. Titles appearing at the
beginning of any subdivision are for convenience only and do not constitute any
part of any such subdivision and shall be disregarded in construing the language
contained in this Agreement. The words "this Agreement", "herein", "hereof",
"hereby", "hereunder" and words of similar import refer to this Agreement as a
whole and not to any particular subdivision unless expressly so limited. The
phrases "this Section" and "this subsection" and similar phrases refer only to
the Sections or subsections hereof in which the phrase occurs. The word "or" is
not exclusive, and the word "including" (in all of its forms) means "including
without limitation". Pronouns in masculine, feminine and neuter gender shall be
construed to include any other gender, and words in the singular form shall be
construed to include the plural and vice versa unless the context otherwise
requires.
ARTICLE II -- SECURITY INTEREST
Section 2.1. GRANT OF SECURITY INTEREST. As collateral security for all of
the Secured Obligations, Debtor hereby pledges and assigns to Secured Party and
grants to Secured Party a continuing security interest in and to all right,
title and interest of the following:
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<PAGE>
(a) PLEDGED SHARES. All of the following, whether now or hereafter
existing, which are owned by Debtor or in which Debtor otherwise has any rights:
the shares of stock described in Exhibit A hereto, all certificates representing
any such shares, all options and other rights, contractual or otherwise, at any
time existing with respect to such shares, and all dividends, cash, instruments
and other property now or hereafter received, receivable or otherwise
distributed in respect of or in exchange for any or all of such shares (any and
all such shares, certificates, options, rights, dividends, cash, instruments and
other property being herein called the "Pledged Shares").
(b) PROCEEDS. All proceeds of any and all of the foregoing Collateral.
In each case, the foregoing shall be covered by this Agreement, whether Debtor's
ownership or other rights therein are presently held or hereafter acquired and
however Debtor's interests therein may arise or appear (whether by ownership,
security interest, claim or otherwise).
Section 2.2. SECURED OBLIGATIONS SECURED. The security interest created
hereby in the Collateral constitutes continuing collateral security for all of
the following obligations, indebtedness and liabilities, whether now existing or
hereafter incurred or arising:
(a) INDEBTEDNESS. The payment by Debtor, as and when due and payable, of
amounts from time to time owing by Debtor under or in respect of the Note and
this Agreement, and the due performance by Debtor of all of its other
obligations under or in respect of the Note and this Agreement.
(b) RENEWALS. All renewals, extensions, amendments, modifications,
supplements, or restatements of or substitutions for any of the foregoing.
As used herein, the term "Secured Obligations" refers to all present and
future indebtedness, obligations, and liabilities of whatever type which are
described above in this section, including any interest which accrues after the
commencement of any case, proceeding, or other action relating to the
bankruptcy, insolvency, or reorganization of the Debtor.
ARTICLE III -- REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 3.1. REPRESENTATIONS AND WARRANTIES. Debtor represents and
warrants to Secured Party as follows:
(a) OWNERSHIP FREE OF LIENS. Debtor has good and marketable title to the
Collateral free and clear of all liens, encumbrances or adverse claims, except
for the security interest created by this Agreement. No dispute, right of
setoff, counterclaim or defense exists with respect to all or any part of the
Collateral. No effective financing statement or other instrument similar in
effect covering all or any part of the Collateral is on file in any recording
office except any which have been filed in favor of Secured Party relating to
this Agreement.
(b) NO CONFLICTS OR CONSENTS. Neither the ownership or the intended use of
the Collateral by Debtor, nor the grant of the security interest by Debtor to
Secured Party herein,
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<PAGE>
nor the exercise by Secured Party of its rights or remedies hereunder, will
(i) conflict with any provision of (a) any domestic or foreign law, statute,
rule or regulation, or (b) any agreement, judgment, license, order or permit
applicable to or binding upon Debtor or Issuer, or (ii) result in or require
the creation of any lien, charge or encumbrance upon any assets or properties
of Debtor except as expressly contemplated herein. No consent, approval,
authorization or order of, and no notice to or filing with, any court,
governmental authority, Issuer or third party is required in connection with
the grant by Debtor of the security interest herein, or the exercise by
Secured Party of its rights and remedies hereunder.
(c) SECURITY INTEREST. Debtor has and will have at all times full right,
power and authority to grant a security interest in the Collateral to Secured
Party as provided herein, free and clear of any lien, adverse claim, or
encumbrance. This Agreement creates a valid and binding first priority security
interest in favor of Secured Party in the Collateral, which security interest
secures all of the Secured Obligations. The taking possession by Secured Party
of all certificates, instruments and cash constituting Collateral from time to
time will perfect, and establish the first priority of, Secured Party's security
interest hereunder in the Collateral securing the Secured Obligations. No
further or subsequent filing, recording, registration, other public notice or
other action is necessary or desirable to perfect or otherwise continue,
preserve or protect such security interest except for continuation statements or
filings described in Section 3.2(b).
(d) PLEDGED SHARES. Debtor has delivered to Secured Party all certificates
evidencing Pledged Shares. All such certificates are valid and genuine and have
not been altered. All shares and other securities constituting the Pledged
Shares have been duly authorized and validly issued, are fully paid and
non-assessable, and were not issued in violation of the preemptive rights of any
Person or of any agreement by which Debtor or the Issuer thereof is bound. All
documentary, stamp or other taxes or fees owing in connection with the issuance,
transfer or pledge of Pledged Shares (or rights in respect thereof) have been
paid. No restrictions or conditions exists with respect to the transfer, voting
or control of any Pledged Shares.
Section 3.2. AFFIRMATIVE COVENANTS. Unless Secured Party shall otherwise
consent in writing, Debtor will at all times comply with the covenants contained
in this Section 3.2 from the date hereof and so long as any part of the Secured
Obligations is outstanding.
(a) OWNERSHIP AND LIENS. Debtor will maintain good and marketable title to
all Collateral free and clear of all liens, encumbrances or adverse claims,
except for the security interest created by this Agreement. Debtor will not
permit any dispute, right of setoff, counterclaim or defense to exist with
respect to all or any part of the Collateral. Debtor will cause to be
terminated any financing statement or other registration or instrument similar
in effect covering all or any part of the Collateral, except any which have been
filed in favor of Secured Party relating to this Agreement. Debtor will defend
Secured Party's right, title and special property and security interest in and
to the Collateral against the claims of any Person.
(b) FURTHER ASSURANCES. Debtor will, at his expense and at any time and
from time to time, promptly execute and deliver all further instruments and
documents and take all further action that may be necessary or desirable or that
Secured Party may request in order (i) to
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perfect and protect the security interest created or purported to be created
hereby and the first priority of such security interest; (ii) to enable
Secured Party to exercise and enforce its rights and remedies hereunder in
respect of the Collateral; or (iii) to otherwise effect the purposes of this
Agreement, including but not limited to: (A) executing and filing such
financing or continuation statements, or amendments thereto, as may be
necessary or desirable or that Secured Party may request in order to perfect
and preserve the security interest created or purported to be created hereby;
(B) delivering to Secured Party (upon request, to the extent not otherwise
required hereunder to be delivered without request) all originals of chattel
paper, documents or instruments which are from time to time included in the
Collateral; and (C) furnishing to Secured Party from time to time statements
and schedules further identifying and describing the Collateral and such
other reports in connection with the Collateral as Secured Party may
reasonably request, all in reasonable detail.
(c) INSPECTION AND INFORMATION. Debtor will keep adequate records
concerning the Collateral and will permit Secured Party and all representatives
appointed by Secured Party, including independent accountants, agents,
attorneys, appraisers and any other persons, to inspect the books and records of
or relating to the Collateral at any time during normal business hours, and to
make photocopies and photographs thereof, and to write down and record any
information as such representatives shall obtain. Debtor will furnish to
Secured Party any information which Secured Party may from time to time request
concerning any covenant, provision or representation contained herein or any
other matter in connection with the Collateral or Debtor's business, properties,
or financial condition.
(d) DELIVERY OF PLEDGED SHARES. All instruments and writings evidencing
the Pledged Shares shall be delivered to Secured Party on or prior to the
execution and delivery of this Agreement. All other instruments and writings
hereafter evidencing or constituting Pledged Shares shall be delivered to
Secured Party promptly upon the receipt thereof by or on behalf of Debtor. All
such Pledged Shares shall be held by or on behalf of Secured Party pursuant
hereto and shall be delivered in suitable form for transfer by delivery with any
necessary endorsement or shall be accompanied by fully executed instruments of
transfer or assignment in blank, all in form and substance satisfactory to
Secured Party.
(e) PROCEEDS OF PLEDGED SHARES. If Debtor shall receive, by virtue of its
being or having been an owner of any Pledged Shares, any (i) stock certificate
(including any certificate representing a stock dividend or distribution in
connection with any increase or reduction of capital, reorganization,
reclassification, merger, consolidation, sale of assets, combination of shares,
stock split, spinoff or split-off), promissory note or other instrument or
writing; (ii) option or right, whether as an addition to, substitution for, or
in exchange for, any Pledged Shares, or otherwise; (iii) dividends payable in
cash (except such dividends permitted to be retained by Debtor pursuant to
Section 4.8 hereof) or in securities or other property, or (iv) dividends or
other distributions in connection with a partial or total liquidation or
dissolution or in connection with a reduction of capital, capital surplus or
paid-in surplus, Debtor shall receive the same in trust for the benefit of
Secured Party, shall segregate it from Debtor's other property, and shall
promptly deliver it to Secured Party in the exact form received, with any
necessary endorsement or appropriate stock powers duly executed in blank, to be
held by Secured Party as Collateral.
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(f) STATUS OF PLEDGED SHARES. The certificates evidencing the Pledged
Shares shall at all times be valid and genuine and shall not be altered. The
Pledged Shares at all times shall be duly authorized, validly issued, fully
paid, and non-assessable, and shall not be issued in violation of the preemptive
rights of any Person or of any agreement by which Debtor or the Issuer thereof
is bound and shall not be subject to any restrictions with respect to transfer,
voting or control of such Pledged Shares, except as disclosed in Exhibit A.
Section 3.3. NEGATIVE COVENANTS. Unless Secured Party shall otherwise
consent in writing, Debtor will at all times comply with the covenants contained
in this Section 3.3 from the date hereof and so long as any part of the Secured
Obligations is outstanding.
(a) TRANSFER OR ENCUMBRANCE. Debtor will not sell, assign (by operation of
law or otherwise), transfer, exchange or otherwise dispose of any of the
Collateral, nor will Debtor grant a Lien upon or execute, file or record any
financing statement or other registration with respect to the Collateral, nor
will Debtor allow any such Lien, financing statement, or other registration to
exist or deliver actual or constructive possession of the Collateral to any
other Person, other than Liens in favor of Secured Party.
(b) IMPAIRMENT OF SECURITY INTEREST. Debtor will not take or fail to take
any action which would in any manner impair the value or enforceability of
Secured Party's first priority security interest in any Collateral.
(c) COMPROMISE OF COLLATERAL. Debtor will not adjust, settle, compromise,
amend or modify any of its rights in the Collateral.
(d) FINANCING STATEMENT FILINGS. Debtor recognizes that financing
statements pertaining to the Collateral have been or may be filed where Debtor
maintains any Collateral, has its records concerning any Collateral or has its
chief executive office or chief place of business. Without limitation of any
other covenant herein, Debtor will not cause or permit any change to be made in
its name, identity or corporate structure, or any change to be made to a
jurisdiction other than as represented in Section 3.1 hereof in (i) the location
of any records concerning any Collateral or (ii) in the location of its chief
executive office or chief place of business, unless Debtor shall have notified
Secured Party of such change at least thirty (30) days prior to the effective
date of such change, and shall have first taken all action required by Secured
Party for the purpose of further perfecting or protecting the security interest
in favor of Secured Party in the Collateral. In any notice furnished pursuant
to this subsection, Debtor will expressly state that the notice is required by
this Agreement and contains facts that may require additional filings of
financing statements or other notices for the purposes of continuing perfection
of Secured Party's security interest in the Collateral.
(e) RESTRICTIONS ON PLEDGED SHARES. Debtor will not enter into any
agreement creating, or otherwise permit to exist, any restriction or condition
upon the transfer, voting or control of any Pledged Shares.
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ARTICLE IV -- REMEDIES, POWERS AND AUTHORIZATIONS
Section 4.1. PROVISIONS CONCERNING THE COLLATERAL.
(a) ADDITIONAL FILINGS. Debtor hereby authorizes Secured Party to file,
without the signature of Debtor where permitted by law, one or more financing or
continuation statements, and amendments thereto, relating to the Collateral.
Debtor further agrees that a carbon, photographic or other reproduction of this
Security Agreement or of any financing statement describing any Collateral is
sufficient as a financing statement and may be filed in any jurisdiction Secured
Party may deem appropriate.
(b) POWER OF ATTORNEY. Debtor hereby irrevocably appoints Secured Party as
Debtor's attorney-in-fact and proxy, with full authority in the place and stead
of Debtor and in the name of Debtor or otherwise, from time to time in Secured
Party's discretion, to take any action, and to execute or indorse any
instrument, certificate or notice, which Secured Party may deem necessary or
advisable to accomplish the purposes of this Agreement including any action or
instrument: (i) to request or instruct each Issuer (and each registrar, transfer
agent, or similar Person acting on behalf of each Issuer) to register the pledge
or transfer of the Collateral to Secured Party; (ii) to otherwise give
notification to any Issuer, registrar, transfer agent, financial intermediary,
or other Person of Secured Party's security interests hereunder; (iii) to ask,
demand, collect, sue for, recover, compound, receive and give acquittance and
receipts for moneys due and to become due under or in respect of any of the
Collateral; (iv) to receive, indorse and collect any drafts or other instruments
or documents; (v) to enforce any obligations included among the Collateral; and
(vi) to file any claims or take any action or institute any proceedings which
Secured Party may deem necessary or desirable for the collection of any of the
Collateral or otherwise to enforce, perfect, or establish the priority of the
rights of Secured Party with respect to any of the Collateral. Debtor hereby
acknowledges that such power of attorney and proxy are coupled with an interest,
and are irrevocable.
(c) PERFORMANCE BY SECURED PARTY. If Debtor fails to perform any agreement
or obligation contained herein, Secured Party may itself perform, or cause
performance of, such agreement or obligation, and the expenses of Secured Party
incurred in connection therewith shall be payable by Debtor under Section 4.5.
(d) COLLECTION RIGHTS. Secured Party shall have the right at any time,
upon the occurrence and during the continuance of an Event of Default, to notify
(or require Debtor to notify) any or all Persons (including any Issuer)
obligated to make payments which are included among the Collateral (whether
accounts, general intangibles, dividends, or otherwise) of the assignment
thereof to Secured Party under this Agreement and to direct such obligors to
make payment of all amounts due or to become due to Debtor thereunder directly
to Secured Party and, upon such notification and at the expense of Debtor and to
the extent permitted by law, to enforce collection thereof and to adjust, settle
or compromise the amount or payment thereof, in the same manner and to the same
extent as Debtor could have done. After Debtor receives notice that Secured
Party has given (and after Secured Party has required Debtor to give) any notice
referred to above in this subsection:
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(i) all amounts and proceeds (including instruments and writings) received
by Debtor in respect of such rights to payments, accounts, or general
intangibles shall be received in trust for the benefit of Secured Party
hereunder, shall be segregated from other funds of Debtor and shall be
forthwith paid over to Secured Party in the same form as so received (with
any necessary indorsement) to be, at Secured Party's discretion, either (A)
held as cash collateral and released to Debtor upon the remedy of all
Events of Default, or (B) if any Event of Default shall have occurred and
be continuing, applied as specified in Section 4.3, and
(ii) Debtor will not adjust, settle or compromise the amount or payment of
any such account or general intangible or release wholly or partly any
account debtor or obligor thereof (including any Issuer) or allow any
credit or discount thereon.
Section 4.2. EVENT OF DEFAULT REMEDIES. If an Event of Default shall have
occurred and be continuing, Secured Party may from time to time in its
discretion, without limitation and without notice except as expressly provided
below:
(a) exercise in respect of the Collateral, in addition to any other rights
and remedies provided for herein, under the other Obligation Documents or
otherwise available to it, all the rights and remedies of a secured party on
default under the UCC (whether or not the UCC applies to the affected
Collateral);
(b) require Debtor to, and Debtor hereby agrees that it will at its expense
and upon request of Secured Party, promptly assemble all or part of the
Collateral as directed by Secured Party and make it (together with all books,
records and information of Debtor relating thereto) available to Secured Party
at a place to be designated by Secured Party which is reasonably convenient to
both parties;
(c) reduce its claim to judgment or foreclose or otherwise enforce, in
whole or in part, the security interest created hereby by any available judicial
procedure;
(d) dispose of, at its office, on the premises of Debtor or elsewhere, all
or any part of the Collateral, as a unit or in parcels, by public or private
proceedings, and by way of one or more contracts (it being agreed that the sale
of any part of the Collateral shall not exhaust Secured Party's power of sale,
but sales may be made from time to time, and at any time, until all of the
Collateral has been sold or until the Secured Obligations have been paid and
performed in full), and at any such sale it shall not be necessary to exhibit
any of the Collateral;
(e) buy the Collateral, or any part thereof, at any public sale;
(f) buy the Collateral, or any part thereof, at any private sale if the
Collateral is of a type customarily sold in a recognized market or is of a type
which is the subject of widely distributed standard price quotations;
(g) apply by appropriate judicial proceedings for appointment of a receiver
for the Collateral, or any part thereof, and Debtor hereby consents to any such
appointment; and
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(h) at its discretion, retain the Collateral in satisfaction of the Secured
Obligations whenever the circumstances are such that Secured Party is entitled
to do so under the UCC or otherwise (provided that Secured Party shall in no
circumstances be deemed to have retained the Collateral in satisfaction of the
Secured Obligations in the absence of an express notice by Secured Party to
Debtor that Secured Party has either done so or intends to do so).
Debtor agrees that, to the extent notice of sale shall be required by law, at
least seven (7) days' notice to Debtor of the time and place of any public sale
or the time after which any private sale is to be made shall constitute
reasonable notification. Secured Party shall not be obligated to make any sale
of Collateral regardless of notice of sale having been given. Secured Party may
adjourn any public or private sale from time to time by announcement at the time
and place fixed therefor, and such sale may, without further notice, be made at
the time and place to which it was so adjourned.
Section 4.3. APPLICATION OF PROCEEDS. If any Event of Default shall have
occurred and be continuing, Secured Party may in its discretion apply any cash
held by Secured Party as Collateral, and any cash proceeds received by Secured
Party in respect of any sale of, collection from, or other realization upon all
or any part of the Collateral, to any or all of the following in such order as
Secured Party may elect:
(a) To the repayment of all costs and expenses, including reasonable
attorneys' fees and legal expenses, incurred by Secured Party in connection with
(i) the administration of this Agreement, (ii) the custody, preservation, use or
operation of, or the sale of, collection from, or other realization upon, any
Collateral, (iii) the exercise or enforcement of any of the rights of Secured
Party hereunder, or (iv) the failure of Debtor to perform or observe any of the
provisions hereof;
(b) To the payment or other satisfaction of any liens, encumbrances, or
adverse claims upon or against any of the Collateral;
(c) To the reimbursement of Secured Party for the amount of any obligations
of Debtor paid or discharged by Secured Party pursuant to the provisions of this
Agreement or the Note, and of any expenses of Secured Party payable by Debtor
hereunder or under the Note.
(d) To the satisfaction of any other Secured Obligations;
(e) By holding the same as Collateral;
(f) To the payment of any other amounts required by applicable law
(including any provision of the UCC); and
(g) By delivery to Debtor or to whomever shall be lawfully entitled to
receive the same or as a court of competent jurisdiction shall direct.
Section 4.4. DEFICIENCY. In the event that the proceeds of any sale,
collection or realization of or upon Collateral by Secured Party are
insufficient to pay all Secured Obligations
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and any other amounts to which Secured Party is legally entitled, Debtor
shall be liable for the deficiency, together with interest thereon as
provided in the Note or (if no interest is so provided) at such other rate as
shall be fixed by applicable law, together with the costs of collection and
the reasonable fees of any attorneys employed by Secured Party to collect
such deficiency.
Section 4.5. INDEMNITY AND EXPENSES. In addition to, but not in
qualification or limitation of, any similar obligations under other Obligation
Documents:
(a) Debtor will indemnify Secured Party from and against any and all
claims, losses and liabilities growing out of or resulting from this Agreement
(including enforcement of this Agreement), WHETHER OR NOT SUCH CLAIMS, LOSSES
AND LIABILITIES ARE IN ANY WAY OR TO ANY EXTENT OWED, IN WHOLE OR PART, UNDER
ANY CLAIM OR THEORY OF STRICT LIABILITY, OR ARE CAUSED BY OR ARISE OUT OF SUCH
INDEMNIFIED PARTY'S OWN NEGLIGENCE, except to the extent such claims, losses or
liabilities are proximately caused by Secured Party's individual gross
negligence or willful misconduct.
(b) Debtor will upon demand pay to Secured Party the amount of any and all
costs and expenses, including the reasonable fees and disbursements of Secured
Party's counsel and of any experts and agents, which Secured Party may incur in
connection with (i) the transactions which give rise to this Agreement, (ii) the
preparation of this Agreement and the perfection and preservation of this
security interest created under this Agreement, (iii) the administration of this
Agreement; (iv) the custody, preservation, use or operation of, or the sale of,
collection from, or other realization upon, any Collateral; (v) the exercise or
enforcement of any of the rights of Secured Party hereunder; or (vi) the failure
by Debtor to perform or observe any of the provisions hereof, except expenses
resulting from Secured Party's gross negligence or willful misconduct.
Section 4.6. NON-JUDICIAL REMEDIES. In granting to Secured Party the power
to enforce its rights hereunder without prior judicial process or judicial
hearing, Debtor expressly waives, renounces and knowingly relinquishes any legal
right which might otherwise require Secured Party to enforce its rights by
judicial process. In so providing for non-judicial remedies, Debtor recognizes
and concedes that such remedies are consistent with the usage of trade, are
responsive to commercial necessity, and are the result of a bargain at arm's
length. Nothing herein is intended, however, to prevent Secured Party or Debtor
from resorting to judicial process at its option.
Section 4.7. OTHER RECOURSE. Debtor waives any right to require Secured
Party to proceed against any other person, to exhaust any Collateral or other
security for the Secured Obligations, or pursue any other remedy in Secured
Party's power. Debtor further waives any and all notice of acceptance of this
Agreement. Debtor authorizes Secured Party, without notice or demand, without
any reservation of rights against Debtor, and without in any way affecting
Debtor's liability hereunder or on the Secured Obligations, from time to time to
(a) take or hold any other property of any type from any other person as
security for the Secured Obligations, and exchange, enforce, waive and release
any or all of such other property, and (b) apply the
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Collateral or such other property and direct the order or manner of sale
thereof as Secured Party may in its discretion determine.
Section 4.8. VOTING RIGHTS, DIVIDENDS, ETC. IN RESPECT OF PLEDGED SHARES.
(a) So long as no Event of Default shall have occurred and be continuing:
(i) Debtor may exercise any and all voting and other consensual rights
pertaining to the Pledged Shares or any part thereof for any purpose not
inconsistent with the terms of this Agreement; PROVIDED, HOWEVER, that
Debtor will not exercise or refrain from exercising any such right, as the
case may be, if Secured Party gives it notice that, in Secured Party's
judgment, such action would have a material adverse effect on the value of
the Pledged Shares or the benefits to Secured Party of its security
interest hereunder;
(ii) Debtor may receive and retain any and all dividends paid in
respect of the Pledged Shares; PROVIDED, HOWEVER, that any and all
(1) dividends paid or payable other than in cash in respect of,
and instruments and other property received, receivable or otherwise
distributed in respect of or in exchange for, any Pledged Shares,
(2) dividends and other distributions paid or payable in cash in
respect of any Pledged Shares in connection with a partial or total
liquidation or dissolution or in connection with a reduction of
capital, capital surplus or paid-in surplus, and
(3) cash paid, payable or otherwise distributed in redemption of,
or in exchange for, any Pledged Shares,
shall be, and shall forthwith be delivered to Secured Party to hold as,
Pledged Shares and shall, if received by Debtor, be received in trust for
the benefit of Secured Party, be segregated from the other property or
funds of Debtor, and be forthwith delivered to Secured Party in the exact
form received with any necessary endorsement or appropriate stock powers
duly executed in blank, to be held by Secured Party as Collateral; and
(iii) Secured Party will execute and deliver (or cause to be executed
and delivered) to Debtor all such proxies and other instruments as Debtor
may reasonably request for the purpose of enabling Debtor to exercise the
voting and other rights which it is entitled to exercise pursuant to
subsection (a)(i) of this section and to receive the dividends which it is
authorized to receive and retain pursuant to subsection (a)(ii) of this
section.
(b) Upon the occurrence and during the continuance of an Event of Default:
(i) all rights of Debtor to exercise the voting and other consensual
rights which it would otherwise be entitled to exercise pursuant to
subsection (a)(i) of this section
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shall, at the election of Secured Party, cease, and all such rights shall
thereupon become vested in Secured Party which shall thereupon have the
sole right to exercise such voting and consensual rights (to the extent
permitted by applicable law);
(ii) all rights of Debtor to receive and retain the dividends and
interest payments which it would otherwise be authorized to receive and
retain pursuant to subsection (a)(ii) of this section shall automatically
cease, and all such rights shall thereupon become vested in Secured Party
which shall thereupon have the sole right to receive and hold as Pledged
Shares such dividends and interest payments;
(iii) without limiting the generality of the foregoing, Secured Party
may at its option exercise any and all rights of conversion, exchange,
subscription or any other rights, privileges or options pertaining to any
of the Pledged Shares as if it were the absolute owner thereof, including,
without limitation, the right to exchange, in its discretion, any and all
of the Pledged Shares upon the merger, consolidation, reorganization,
recapitalization or other adjustment of the Issuer, or upon the exercise by
the Issuer of any right, privilege or option pertaining to any Pledged
Shares, and, in connection therewith, to deposit and deliver any and all of
the Pledged Shares with any committee, depository, transfer, agent,
registrar or other designated agent upon such terms and conditions as it
may determine; and
(iv) all dividends and interest payments which are received by Debtor
contrary to the provisions of subsection (b)(ii) of this section shall be
received in trust for the benefit of Secured Party, shall be segregated
from other funds of Debtor, and shall be forthwith paid over to Secured
Party as Pledged Shares in the exact form received, to be held by Secured
Party as Collateral.
Section 4.9. PRIVATE SALE OF PLEDGED SHARES. Debtor recognizes that
Secured Party may deem it impracticable to effect a public sale of all or any
part of the Pledged Shares and that Secured Party may, therefore, determine to
make one or more private sales of any such securities to a restricted group of
purchasers who will be obligated to agree, among other things, to acquire such
securities for their own account, for investment and not with a view to the
distribution or resale thereof, except as permitted by applicable securities
laws. Debtor acknowledges that any such private sale may be at prices and on
terms less favorable to the seller than the prices and other terms which might
have been obtained at a public sale and, notwithstanding the foregoing, agrees
that such private sales shall be deemed to have been made in a commercially
reasonable manner and that Secured Party shall have no obligation to delay sale
of any such securities for the period of time necessary to permit the Issuer of
such securities to register such securities for public sale under the Securities
Act of 1933, as amended. Debtor further acknowledges and agrees that any offer
to sell such securities which has been (a) publicly advertised on a BONA FIDE
basis in a newspaper or other publication of general circulation in the
financial community of Denver, Colorado (to the extent that such an offer may be
so advertised without prior registration under the Securities Act), or (b) made
privately in the manner described above to not less than fifteen (15) BONA FIDE
offerees shall be deemed to involve a "public sale" for purposes of the UCC (or
any successor or similar, applicable statutory provision) as then in effect in
the State of Colorado, notwithstanding that
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such sale may not constitute a "public offering" under the Securities Act of
1933, as amended, and that Secured Party may, in such event, bid for the
purchase of such securities.
ARTICLE V. -- MISCELLANEOUS
Section 5.1. NOTICES. Any notice or communication required or permitted
hereunder shall be given in writing, sent by (a) personal delivery, (b)
expedited delivery service with proof of delivery, (c) registered or certified
United States mail, postage prepaid, or (d) telegram, fax or telex, addressed to
the appropriate party as follows:
To Debtor: __________________________
__________________________
To Secured Party: 265 Turner Drive
Durango, Colorado 81301
Fax: 970/259.5895
or to such other address or to the attention of such other individual as
hereafter shall be designated in writing by the applicable party sent in
accordance herewith. Any such notice or communication shall be deemed to have
been given either at the time of personal delivery or, in the case of delivery
service or mail, as of the date of first attempted delivery at the address and
in the manner provided herein, or in the case of telegram, telex or fax, upon
receipt.
Section 5.2. AMENDMENTS. No amendment of any provision of this Agreement
shall be effective unless it is in writing and signed by Debtor and Secured
Party, and no waiver of any provision of this Agreement, and no consent to any
departure by Debtor therefrom, shall be effective unless it is in writing and
signed by Secured Party, and then such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given and to the
extent specified in such writing.
Section 5.3. PRESERVATION OF RIGHTS. No failure on the part of Secured
Party to exercise, and no delay in exercising, any right hereunder or under any
other Obligation Document shall operate as a waiver thereof; nor shall any
single or partial exercise of any such right preclude any other or further
exercise thereof or the exercise of any other right. Neither the execution nor
the delivery of this Agreement shall in any manner impair or affect any other
security for the Secured Obligations. The rights and remedies of Secured Party
provided herein and in the Note are cumulative and are in addition to, and not
exclusive of, any rights or remedies provided by law.
Section 5.4. UNENFORCEABILITY. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or invalidity without
invalidating the remaining portions hereof or thereof or affecting the validity
or enforceability of such provision in any other jurisdiction.
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Section 5.5. SURVIVAL OF AGREEMENTS. All representations and warranties
of Debtor herein, and all covenants and agreements herein shall survive the
execution and delivery of this Agreement, the execution and delivery of the Note
and the creation of the Secured Obligations.
Section 5.6. BINDING EFFECT AND ASSIGNMENT. This Agreement creates a
continuing security interest in the Collateral and (a) shall be binding on
Debtor and his estate, personal representatives, heirs, executors,
administrators, successors and permitted assigns and (b) shall inure, together
with all rights and remedies of Secured Party hereunder, to the benefit of
Secured Party and its successors, transferees and assigns. Without limiting the
generality of the foregoing, Secured Party may pledge, assign or otherwise
transfer any or all of its rights under this Agreement and the Note to any other
person, and such other person shall thereupon become vested with all of the
benefits in respect thereof granted to Secured Party, herein or otherwise. None
of the rights or duties of Debtor hereunder may be assigned or otherwise
transferred without the prior written consent of Secured Party.
Section 5.7. TERMINATION. Upon the satisfaction in full of the Secured
Obligations, and upon written request for the termination hereof delivered by
Debtor to Secured Party, this Agreement and the security interest created hereby
shall terminate and all rights to the Collateral shall revert to Debtor.
Secured Party will, upon Debtor's request and at Debtor's expense, (a) return to
Debtor such of the Collateral as shall not have been sold or otherwise disposed
of or applied pursuant to the terms hereof; and (b) execute and deliver to
Debtor such documents as Debtor shall reasonably request to evidence such
termination.
Section 5.8. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Colorado applicable to
contracts made and to be performed entirely within such State, except as
required by mandatory provisions of law and except to the extent that the
perfection and the effect of perfection or non-perfection of the security
interest created hereunder, in respect of any particular collateral, are
governed by the laws of a jurisdiction other than such State.
Section 5.9. COUNTERPARTS. This Agreement may be separately executed in
any number of counterparts, all of which when so executed shall be deemed to
constitute one and the same Agreement.
IN WITNESS WHEREOF, Debtor has caused this Agreement to be executed and
delivered this Agreement by its officer thereunto duly authorized, as of the
date first above written.
_________________________________
[_______________________]
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EXHIBIT A
DESCRIPTION OF INTERESTS IN ISSUERS
8,000 shares of common stock, par value $.03 per share, of Rocky Mountain
Chocolate Factory, Inc., evidenced by Certificate No.____________.
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Schedule to
Form of Promissory Note and
Stock Pledge Agreement
Each of the following officers or directors of the Registrant has made a
Promissory Note and executed a related Stock Pledge Agreement, in the foregoing
forms, in favor of the Registrant:
Edward L. Dudley
Clifton W. Folsom
Gary S. Hauer
Bryan J. Merryman
Lee N. Mortenson
<PAGE>
ASSET PURCHASE AGREEMENT
This agreement ("AGREEMENT"), is made and entered into on this 5th day of June,
1998, but to be made effective as of the 31st day of July, 1998, by and among
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC., a corporation organized under the laws
of the State of Colorado, ("SELLER "), RESORT CONFECTIONS, INC., a Colorado
corporation ("RC" or "PURCHASER") and William Don Grueser and Patricia C.
Grueser, the sole shareholders of RC (collectively referred to as "GRUESERS").
(Seller, Purchaser and Gruesers shall be collectively referred to as "PARTIES").
RECITALS:
A. WHEREAS, Seller owns and operates 10 theme candy stores under the
name and mark "FUZZIWIG'S CANDY FACTORY" ("COMPANY OWNED STORES") and Seller is
the franchisor under two franchise agreements for two additional FUZZIWIG'S
CANDY FACTORY stores ("FRANCHISED STORES"); and Seller owns certain assets
designated for use in connection with the operation of the Company Owned Stores
("ASSETS");
B. WHEREAS, Seller is desirous of selling to Purchaser and Purchaser is
desirous of purchasing from Seller substantially all of the assets owned by
Seller and used in connection with the operation of the Company Owned Stores,
Seller's rights as the franchisor under the franchise agreements governing the
Franchised Stores and the Assets (collectively referred to as the "FUZZIWIG'S
SYSTEM"), upon the terms and conditions and for the consideration set forth
herein; and
C. WHEREAS, Seller also owns and operates a chocolate manufacturing
facility and serves as the franchisor for a total of over 175 chocolate stores
which operate under the name and mark "ROCKY MOUNTAIN CHOCOLATE FACTORY" ("RMCF
SYSTEM"), but none of Seller's ROCKY MOUNTAIN CHOCOLATE FACTORY stores, no
interest in Seller's chocolate manufacturing business nor any of Seller's
interests as franchisor in any of its franchised ROCKY MOUNTAIN CHOCOLATE
FACTORY stores are being sold by Seller nor purchased by Purchaser under the
terms of this Agreement.
NOW THEREFORE, for and in consideration of the mutual promises and
covenants contained herein, and for other good and valuable consideration, and
subject to the terms and conditions of this Agreement, the Parties hereto agree
as follows:
<PAGE>
1. PURCHASE AND SALE
1.1 ASSETS TO BE SOLD AND PURCHASED. Subject to and upon the terms and
conditions contained herein, at the Closing (defined below), Seller shall sell,
transfer, assign, convey and deliver to the Purchaser, free and clear of all
adverse claims, security interests, liens and encumbrances except as disclosed
to, assumed or approved by Purchaser pursuant to the terms of this Agreement,
and the Purchaser shall purchase, accept and acquire from Seller, all of the
Purchased Assets (defined below) all of which are owned and used by Seller in
connection with the operation of the Fuzziwig's System. The Exhibits and
Schedules referenced in this Agreement shall be compiled, in accordance with all
applicable statues, rules and regulations, between the date this Agreement is
signed and the Closing Date. All Exhibits and Schedules shall be attached to
this Agreement on the Closing Date. The term "PURCHASED ASSETS" more
specifically includes:
a. COMPANY OWNED STORES. Except as specifically excluded herein,
all right, title and interest of Seller in and to the personal property and all
other improvements located at the 10 addresses of the Company Owned Stores set
forth on EXHIBIT I attached hereto, subject to all rights of the lessors to such
improvements in accordance with the terms of each lease agreement governing each
of the Company Owned Stores, copies of which lease agreements are attached
hereto as EXHIBIT II.
i. INVENTORY AND SUPPLIES. All inventory and supplies owned
by Seller which are located on the premises of the Company Owned Stores as of
Closing or which are part of the Assets and are located in various warehouses in
Durango, Colorado, as of Closing, but are designated for use in connection with
the operation of the Company Owned Stores, all of which are described in
SCHEDULE 1.1.a.i hereto;
ii. FURNITURE, FIXTURES AND EQUIPMENT. All right, title and
interest of Seller in and to the furniture, furnishings, trade fixtures,
animated figures, leasehold improvements and equipment, including cash
registers, computers, telephones and fax machines, which are used by Seller in
connection with the operation of the Company Owned Stores and are located at the
addresses set forth on EXHIBIT I as of Closing;
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iii. RECORDS. All books and records which are on the premises
of the Company Owned Stores relating to the Purchased Assets as of Closing and
photocopies of applicable books and business records of the Company Owned Stores
relating to the Purchased Assets as of Closing, as reasonably requested; and
iv. GOVERNMENTAL LICENSES, PERMITS AND APPROVALS. To the
extent transferable, all governmental licenses, certificates of public
convenience, operating permits, approvals and similar permits and approvals
issued to Seller in connection with and directly relating to the operation of
the Company Owned Stores, all of which are described on SCHEDULE 1.1.a.iv
hereto.
b. FUZZIWIG'S SYSTEM. The following assets of the Fuzziwig's System
shall also be included in the Purchased Assets:
i. INTELLECTUAL PROPERTY. All of Seller's right, title and
interest in and to the trademarks and service marks used in connection with the
operation of the Fuzziwig's System, two of which are registered with the United
States Patent and Trademark Office, and other marks, trade names and
applications for the foregoing, if any, as of Closing (collectively, "MARKS"),
including the use of the name "FUZZIWIG'S CANDY FACTORY," all of which are
described in SCHEDULE 1.1.b.i hereto;
ii. PROPRIETARY INFORMATION. All of Seller's rights to the
Fuzziwig's System's supplier lists, franchisee operations manuals, franchisee
training manuals, the Fuzziwig's System Uniform Franchise Offering Circular
("UFOC") and advertising and marketing materials attached hereto as SCHEDULE
1.1.b.ii;
iii. GOODWILL. All of Seller's goodwill arising out of the
use of the Marks as of the date of Closing; and
iv. RELATED CONTRACTUAL RIGHTS. To the extent they are
transferable according to their respective terms, all of Seller's rights and
interest in, to or under the contracts, agreements, leases, commitments and
licenses directly relating to the Purchased Assets and described in SCHEDULE
1.1.b.iv hereto.
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C. FRANCHISE AGREEMENTS. Seller's interest in and under two
franchise agreements, copies of which are attached in SCHEDULE 1.1.c hereto, in
which Seller is the franchisor of two FUZZIWIG'S CANDY FACTORY stores.
1.2 EXCLUDED ASSETS. Notwithstanding anything herein to the contrary, the
following assets of Seller shall not be conveyed to or purchased by Purchaser:
a. ORDINARY COURSE OF BUSINESS DISPOSITIONS. Properties, assets,
rights or interests otherwise included in the definition of Purchased Assets
which Seller shall have sold, transferred or disposed of prior to the Closing
Date, defined below, in the ordinary course of business and not in breach of
this Agreement.
b. ACCOUNTS RECEIVABLE. All accounts receivable of any kind or
nature generated by Company Owned Stores and all cash on hand in the Company
Owned Stores through the Closing Date.
c. NO OTHER ASSETS. Other than the Purchased Assets described in
Section 1.1 and the Schedules and Exhibits mentioned therein, no other assets of
Seller shall be sold or assigned.
1.3 NONASSIGNABLE PERMITS, LICENSES, LEASES AND CONTRACTS.
a. NONASSIGNABILITY. To the extent that any lease, contract,
license, permit, approval or any other property or contractual interest
otherwise constituting a part of the Purchased Assets is not capable of being
assigned or transferred, or if such assignment or transfer or attempted
assignment or transfer would constitute a breach thereof or a violation of any
law, decree, order, regulation or other governmental edict, this Agreement shall
not constitute an assignment or transfer thereof, or an attempted assignment or
transfer thereof, and such lease, contract, license, permit, approval, or
interest shall be excluded from the definition of Purchased Assets and shall not
be sold to Purchaser hereunder. Notwithstanding the foregoing, if any Company
Owned Store lease is not assignable, the Parties will enter into a sublease or
take such other action as is reasonably necessary to provide the Parties with
the intended benefit of this Agreement with respect thereto.
b. SELLER TO USE REASONABLE EFFORTS. After this Agreement has been
signed by all Parties, Seller will exercise reasonable efforts, and Purchaser
will cooperate with
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Seller, to obtain any consents and waivers of third parties and to resolve
any impracticalities arising in connection with the assignments and transfers
of the Purchased Assets as contemplated hereunder and to obtain any other
material consents and waivers necessary to convey to Purchaser any of the
Purchased Assets. The Parties acknowledge that after this Agreement has been
signed by all Parties, Seller will attempt to obtain third party consents to
the assignment of the leases for the premises of the Company Owned Stores and
other contracts, permits and licenses related to the Purchased Assets, but
Seller makes no guarantees that any such consents will be obtained prior to
the Closing Date.
1.4 ASSUMPTION OF LIABILITIES.
a. ASSUMED OBLIGATIONS. Except as otherwise provided in this
Agreement, Purchaser and its successors and permitted assigns will assume
effective as of the day after the Closing Date, and thereafter will promptly and
fully pay and satisfy in accordance with their respective terms, all
liabilities, obligations, contracts and commitments of Seller directly affecting
or arising out of the operation of the Company Owned Stores and the Franchised
Stores, as of the Closing Date, based on Seller's usual and ordinary accounting
practices, as listed in SCHEDULE 1.4.a to this Agreement.
b. SALES TAXES. Purchaser will be responsible for all sales tax
liability incurred by reason of the transfer of the Purchased Assets
contemplated by this Agreement.
c. PURCHASER'S INDEMNIFICATION. Purchaser and Gruesers, jointly and
severally, agree that they shall indemnify and hold Seller harmless from and
against any and all claims, liabilities, costs, expenses and damages (including
reasonable attorneys' fees) relating to or arising from: (i) any liability
assumed by Purchaser or Gruesers under the terms of this Agreement; (ii) any
breach of representations, warranties or covenants made by Purchaser or Gruesers
as set forth in this Agreement; and (iii) the ownership, use or operation of the
Company Owned Stores, the Franchised Stores or any other Purchased Assets, or
any other actions taken by Purchaser or Gruesers, after Closing.
d. SELLER'S INDEMNIFICATION. Seller hereby agrees to indemnify
Purchaser and Gruesers and to hold Purchaser and Gruesers harmless from and
against, any and all
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claims, expenses and damages (including reasonable attorneys' fees) incurred
by Purchaser and Gruesers, arising from or related to:
i. obligations or liabilities of Seller not assumed by
another Party under the terms of this Agreement or otherwise listed in the
Exhibits and Schedules that are part of this Agreement;
ii. any breach of representations, warranties or covenants
made by Seller as set forth in this Agreement; and
iii. ownership, use or operation of the Company Owned Stores,
the Franchised Stores or any other Purchased Assets or any other actions taken
by Seller related to the Purchased Assets on or before Closing.
1.5 PURCHASE PRICE AND PAYMENT TERMS.
a. PURCHASE PRICE. The total consideration ("PURCHASE PRICE")
payable to Seller by Purchaser for the Purchased Assets shall be One Million
Six Hundred Thousand Dollars (US $1,600,000). The Purchase Price shall be paid
in the following manner:
i. A downpayment toward the Purchase Price in the amount of
$25,000 has been delivered to Seller prior to the execution of this Agreement,
which amount is refundable until June 11, 1998 when this Agreement is signed by
Purchaser; afterwards, it is nonrefundable;
ii. $75,000 in immediately available funds at the Closing;
iii. $80,000 in the form of a Promissory Note, attached as
EXHIBIT III, to be paid in a lump sum with interest at 8 1/2% per annum
payable six months after the Closing Date ("NOTE"); and
iv. The balance of $1,420,000 of the Purchase Price shall be
paid in the form of a like kind exchange of the assets of four ROCKY MOUNTAIN
CHOCOLATE FACTORY Stores owned by the Purchaser and Gruesers listed on SCHEDULE
1.5.a.iv. attached hereto ("EXCHANGED ASSETS"). Subject to and upon the
conditions contained herein, at the Closing, Gruesers and Purchaser shall
transfer, assign, convey and deliver to Seller, free and clear of all adverse
claims, security interests, liens and encumbrances except as disclosed to,
assumed or approved by Seller pursuant to the terms of this Agreement, and
Seller shall accept
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and acquire from Gruesers and Purchaser, all of the Exchanged Assets, which
are owned and operated by Gruesers and Purchaser in the form of four ROCKY
MOUNTAIN CHOCOLATE FACTORY Stores ("GRUESER'S STORES"). The term "EXCHANGED
ASSETS" more specifically includes (i) all right, title and interest of
Gruesers and Purchaser in and to the personal property and all other
improvements located at the four addresses of the Grueser's Stores set forth
on EXHIBIT IV attached hereto, subject to all rights of the lessors to such
improvements in accordance with the terms of each lease agreement governing
each of the Grueser's Stores, copies of which lease agreements are attached
hereto as EXHIBIT V; (ii) all inventory and supplies owned by Gruesers and
Purchaser which are located on the premises of the Grueser's Stores as of
Closing and all other assets which may be located elsewhere but are
designated for use in connection with the operation of the Grueser's Stores,
all of which are described in SCHEDULE 1.5.a.iv. attached hereto; (iii) all
right, title and interest of Gruesers and Purchaser in and to the furniture,
furnishings, trade fixtures, leasehold improvements and equipment, including
cash registers, computers, telephones and fax machines, which are used by
Gruesers and Purchaser in connection with the operation of the Grueser's
Stores; (iv) all books and records which are on the premises of the Grueser's
Stores relating to the Exchanged Assets as of Closing and photocopies of
applicable books and business records of the Grueser's Stores relating to the
Exchanged Assets as of Closing, as reasonably requested; (v) to the extent
transferable, all governmental licenses, certificates of public convenience,
operating permits, approvals and similar permits and approvals issued to
Gruesers and/or Purchaser in connection with and directly relating to the
operation of the Grueser's Stores, all of which are described on SCHEDULE
1.5.a.iv. hereto; and (vi) all of the Grueser's right, title and interest in,
to or under the Franchise Agreements which govern the Grueser's Stores, and
all other rights and interests in, to or under other contracts, agreements,
leases, commitments and licenses directly relating to the Exchanged Assets
and described in SCHEDULE 1.5.a.iv. hereto. Notwithstanding anything herein
to the contrary, all accounts receivable of any kind or nature generated by
the Grueser's Stores and all cash on hand in the Grueser's Stores through the
Closing Date and all other properties, assets, rights or interests of the
Gruesers and Purchaser which shall not be included in the definition of
Exchanged Assets, shall not be conveyed to Seller hereunder.
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b. NONASSIGNABILITY. To the extent that any lease, contract,
license, permit, approval or any other property or contractual interest
otherwise constituting a part of the Exchanged Assets is not capable of being
assigned or transferred, or if such assignment or transfer or attempted
assignment or transfer would constitute a breach thereof or a violation of any
law, decree, order, regulation or other governmental edict, this Agreement shall
not constitute an assignment or transfer thereof, or an attempted assignment or
transfer thereof, and such lease, contract, license, permit, approval, or
interest shall be excluded from the definition of Exchanged Assets and shall not
be transferred to Seller hereunder. Notwithstanding the foregoing, if any of
the Grueser's Store leases are not assignable, the Parties will enter into a
sublease or take such other action as is reasonably necessary to provide the
Parties with the intended benefit of this Agreement with respect thereto.
c. PURCHASER TO USE REASONABLE EFFORTS. After this Agreement has
been signed by all Parties, Purchaser will exercise reasonable efforts, and
Purchaser will cooperate with Purchaser, to obtain any consents and waivers of
third parties and to resolve any impracticalities arising in connection with the
assignments and transfers of the Exchanged Assets as contemplated hereunder and
to obtain any other material consents and waivers necessary to convey to Seller
any of the Exchanged Assets. The Parties acknowledge that after this Agreement
has been signed by all Parties, Purchaser will attempt to obtain third party
consents to the assignment of the leases for the premises of the Grueser's
Stores and other contracts, permits and licenses related to the Exchanged
Assets, but Purchaser makes no guarantees that any such consents will be
obtained prior to the Closing Date.
d. ASSUMED OBLIGATIONS. Except as otherwise provided in this
Agreement, Seller and its successors and permitted assigns will assume effective
as of the day after the Closing Date, and thereafter will promptly and fully pay
and satisfy in accordance with their respective terms, all liabilities,
obligations, contracts and commitments of Gruesers and Purchaser directly
affecting or arising out of the operation of the Grueser's Stores, as of the
Closing Date, based on the Gruesers usual and ordinary accounting practices, as
listed on SCHEDULE 1.5.d. attached to this Agreement.
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e. ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be
allocated among the Purchased Assets as reasonably agreed by the Parties on
the Closing Date. Seller and Purchaser mutually agree to file all applicable
federal tax forms following the Closing Date, including all those related to
the like kind exchange.
f. NOTE. The Note securing $80,000 of the Purchase Price shall
be a negotiable promissory note and shall provide in part that, upon any
uncured default in any payment of principal or interest, the entire amount of
principal and interest, at the option of the holder of the Note, shall become
immediately due; that if action is instituted on the Note, Purchaser agrees
to pay all reasonable costs and attorneys' fees, and that Purchaser shall
have the option to prepay, without penalty, all or any portion of the unpaid
balance.
1.6 CLOSING. Subject to the conditions precedent set forth herein, the
Closing ("CLOSING") shall take place at Seller's offices, 265 Turner Drive,
Durango, Colorado 81301 on July 31, 1998 at a time mutually agreed by the
parties or such earlier or later date and time mutually agreed to by the
parties ("CLOSING DATE"). This Agreement shall be effective and binding when
signed by all Parties on June 11, 1998.
1.7 ASSUMPTION OF OWNERSHIP AND POSSESSION. Purchaser shall take
ownership, possession and control of the Purchased Assets and shall take
possession of the Company Owned Stores as of the day after the Closing Date,
August 1, 1998. Seller shall take ownership, possession and control of the
Exchanged Assets as of the day after the Closing Date, August 1, 1998. All
deliveries which are practicable shall be made at the Closing.
1.8 CONTINUING OBLIGATIONS. The Parties acknowledge and agree that the
purpose of this Agreement and related agreements is to convey and deliver to
Purchaser the assets, properties, rights and interests of Seller, real and
personal, tangible and intangible, necessary to, relating to or used solely
with respect to the operation of the Fuzziwig's System. Accordingly, Seller
agrees that, should any such thing by inadvertence not be conveyed or
delivered to Purchaser at the Closing, it will do such acts as shall be
necessary to promptly effect the conveyance and delivery of all such things.
The Parties also acknowledge and agree that the purpose of this Agreement and
related agreements is to convey and deliver to Seller the assets, properties,
rights and interests of Gruesers and Purchaser, real and personal, tangible
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and intangible, necessary to, relating to or used solely with respect to the
operation of the Grueser's Stores. Accordingly, Gruesers and Purchaser agree
that, should any such thing by inadvertence not be conveyed or delivered to
Seller at the Closing, they will do such acts as shall be necessary to
promptly effect the conveyance and delivery of all such things.
1.9 EMPLOYEE MATTERS. Seller will take all actions necessary to
terminate all of Seller's employees who are employed at the Company Owned
Stores effective as of the Closing Date. Seller will be responsible for all
employees' compensation, benefits and taxes up to the Closing Date including,
but not limited to, accrued vacation pay, sick pay, and accrued personal
leave. Purchaser intends to employ Seller's employees after the Closing, but
the creation and terms of any employment relationship after the Closing shall
be Purchaser's responsibility. Similarly with respect to employees employed
at the Grueser's Stores, Purchaser and Gruesers will take all actions
necessary to terminate all of such employees effective as of the Closing
Date. Gruesers and Purchaser will be responsible for all such employees'
compensation, benefits and taxes up to the Closing Date including, but not
limited to, accrued vacation pay, sick pay, and accrued personal leave.
Seller intends to employ Purchaser's employees after the Closing, but the
creation and terms of any employment relationship after the Closing shall be
Seller's responsibility.
2. NONCOMPETITION AGREEMENT
Simultaneously with the Closing of the transactions herein contemplated,
Purchaser, Gruesers and Seller shall enter into a Noncompetition Agreement in
the form of EXHIBIT VI hereto which shall provide, in part, that Seller shall
not engage, either directly or indirectly, in ownership or operation of theme
candy stores for 18 months following the Closing Date and that neither RC nor
the Gruesers will engage, either directly or indirectly, in ownership or
operation of stores competitive with the stores in the ROCKY MOUNTAIN
CHOCOLATE FACTORY System for 18 months following the Closing Date, subject to
the terms of this Agreement.
3. REPRESENTATIONS AND WARRANTIES
Seller hereby represents and warrants that the following are true and
correct as of the date hereof and will be true and correct through the
Closing Date as if made on that date:
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a. CORPORATE STATUS. Seller is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Colorado, with all requisite corporate power and authority to carry on its
Fuzziwig's System business.
b. LITIGATION. There are no claims, actions, suits, proceedings,
or investigations pending or threatened against or affecting the Fuzziwig's
System in any court or by or before any federal, state, municipal or other
governmental department, commission, board, bureau, agency or other
instrumentality, domestic or foreign, or arbitration tribunal or other forum
which, if determined adversely to Seller, would materially affect Purchaser's
ability to operate the Fuzziwig's System immediately after Closing as it is
now being conducted. There are no judgments, decrees, injunctions, writs,
orders or other mandates outstanding which would materially affect
Purchaser's ability to operate the Fuzziwig's System immediately after the
Closing.
c. ESTOPPEL. All statements made by Seller in this Agreement, or
in any Exhibit or Schedule hereto, or in any document or certificate required
to be executed and delivered under this Agreement, are true, correct and
complete to the best of its knowledge as of the date of this Agreement and
will be so as of the Closing Date.
d. COMPLIANCE WITH LAWS AND PERMITS. To the best of its
knowledge, Seller has complied in all material respects with all laws,
regulations and rules, orders, judgments, writs, decrees or injunctions of
federal, state and municipal governments or any department, agency or other
instrumentality thereof, applicable to the Fuzziwig's System and has not done
or omitted to do any act or acts which are in violation of any of the
foregoing. Seller has obtained all federal, state and municipal licenses and
permits necessary to operate the Company Owned Stores and to operate as the
franchisor of the Franchised Stores, is not in violation of any such license
or permit and has not received any notification that any revocation or
limitation thereof is pending or threatened, except where the failure to
obtain the same, or violation, revocation, or limitation thereof, would not
have a materially adverse effect on the Fuzziwig's System as a whole.
Notwithstanding the foregoing, the Parties acknowledge that the effectiveness
of Seller's Fuzziwig's System UFOC and many of Seller's state franchise
registrations have expired or are due to expire on or shortly after June 1,
1998.
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e. LEASES AND CONTRACTS. Seller is not the owner, lessor or
sublessor with respect to the premises of any of the Company Owned Stores or
the Franchised Stores. All leases for the premises of the Company Owned
Stores are valid and binding agreements of Seller, there is no material
breach or violation of or default under any provision of any such lease, and
no fact or event has occurred which would materially affect Seller's interest
in or under any such lease. Seller owns good and merchantable title to all
such leasehold interests free and clear of all material mortgages, liens,
pledges, restrictions, charges or encumbrances of any nature. Seller has no
other leasehold interests in real or personal property or contract rights
which are material to the operation of the Purchased Assets. Purchaser shall
be responsible for a maximum of $500 per lease for costs associated with
assigning said leases and Seller shall pay all costs over and above $500
related to said lease assignments.
f. TRADEMARKS AND COPYRIGHTS. Attached to this Agreement as
SCHEDULE 3.f is a description of all registered trademarks, service marks,
copyrights, trade names and licenses and applications pending therefor, owned
by Seller, which are used in the operation of the Fuzziwig's System.
Assignments for each such registered trademark and service mark and copies of
all other rights or applications shall be furnished to Purchaser on the
Closing Date. Seller owns all trademarks, trade names, service marks and
copyrights used in the operation of the Fuzziwig's System and, to the best
of Seller's knowledge, such use does not conflict with, infringe upon or
violate the rights of any third party in a manner which might have a
materially adverse effect upon the Fuzziwig's System.
g. AUTHORIZATION AND VALIDITY. The execution, delivery and
performance by Seller of this Agreement and any other agreements
contemplated hereby, and the consummation of the transactions contemplated
hereby and thereby, have been duly authorized by Seller's Board of Directors
and its shareholders, if required by law or Seller's bylaws. This Agreement
and all other agreements contemplated hereby have been or will be as of the
Closing Date duly executed and delivered by Seller and constitutes and will
constitute legal, valid and binding obligations of Seller, enforceable
against it in accordance with their respective terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting creditors' rights
generally and by
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general principles of equity that may limit availability of certain equitable
remedies in certain instances.
h. RESTRICTIVE COVENANTS. Prior to the consummation of the
proposed transaction, Seller shall operate the Fuzziwig's System and use the
Purchased Assets in the ordinary and usual course of business without unusual
commitments and in compliance with all applicable laws, rules and regulations.
i. CONSENTS; APPROVALS; CONFLICT. No consent, approval,
authorization or order of any court or governmental agency or other body is
required for Seller to consummate the sale of the Purchased Assets. Neither
the execution, delivery or performance of this Agreement shall conflict
with, or constitute a breach of, and no prior approval is necessary by or
under, Seller's articles of incorporation or bylaws, as amended to date, or
any note, mortgage, indenture, deed of trust, lease, obligation, or other
agreement or instrument to which Seller is a party or by which it is bound
nor, to the best of Seller's knowledge, any existing law, rule, regulation,
or any decree of any court or governmental department, agency, commission,
board or bureau, having jurisdiction over Seller. To the best of Seller's
knowledge, Seller is not required to give any notice to, or make any filing
with, or obtain any authorization, consent or approval of, any government or
governmental agency in order for the parties to consummate the transactions
contemplated by this Agreement.
j. ASSETS SOLD "AS-IS." To the best of Seller's knowledge, the
inventories, supplies and equipment which constitute a part of the Purchased
Assets are usable in the ordinary course of business. The Parties
acknowledge and agree that the Purchased Assets are being sold "as-is,
where-is" with no warranties or guaranties except that Seller shall warrant
that the Purchased Assets will be in good operating condition on the Closing
Date. EXCEPT AS EXPRESSLY SET FORTH HEREIN, SELLER MAKES NO REPRESENTATIONS
OR WARRANTIES (EXPRESS OR IMPLIED) AS TO THE CONDITION, REPAIR, QUANTITIES,
SALEABILITY, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY OF
THE PURCHASED ASSETS.
k. TITLE TO ASSETS. Seller shall have on the Closing Date, good
and marketable title to all of the Purchased Assets and said Purchased Assets
owned by it shall not
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be subject to any material mortgage, lien, pledge, lease, security interest
or encumbrance, except as disclosed to Purchaser.
l. TAXES.
i. PAYMENT OF TAXES. All Taxes, defined below, of Seller
relating to the Company Owned Stores, Franchised Stores and Purchased Assets
relating to periods or portions thereof ending on or before the Closing Date,
have been paid, or will have been paid, or an adequate reserve established
therefor in conformity with generally accepted accounting principles
consistently applied, and Seller has no liability for Taxes in excess of the
amounts so paid or reserves so established. All Taxes that Seller has been
required to collect or withhold have been duly collected or withheld and, to
the extent required when due, have been or will be duly paid to the proper
taxing authority.
ii. DEFINITION OF TAXES. For purposes of this Agreement,
"Taxes" shall mean all federal, state, local, foreign and other taxes,
levies, imposts, assessments, impositions or other similar government
charges, including, without limitation, income, estimated income, business,
occupation, franchise, real property, payroll, personal property, sales,
transfer, stamp, use, employment, commercial rent or withholding, occupancy,
premium, gross receipts, profits, windfall profits, deemed profits, license,
lease, severance, capital, production, corporation, ad valorem, excise, duty
or other taxes, including interest, penalties and additions thereto.
m. ASSISTANCE FOLLOWING THE CLOSING DATE. Seller will provide
the services of its employee, Ms. Abra Stafford, for not more than 7.5 hours
per day and not more than a total of 35 hours per week, Monday through
Friday, during the six months following the Closing Date, to consult with the
Purchaser in its assumption and operation of the Purchased Assets. Purchaser
shall pay all of Ms. Stafford's travel and related expenses, but her salary
shall continue to be paid by Seller during this period. For six months after
the Closing Date, Seller shall grant limited access to Purchaser to RMCF
Creative Services for a total of not more than 20 hours per month, regarding
in-store and merchandise product promotion. Purchaser shall further be
entitled to limited consulting services for a maximum of 10 hours per month
from one or both of C. Wade Folsom and J.D. Haas combined, for a period of
one
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year after the Closing Date. In addition, if Purchaser gives written notice
to Seller in accordance with the terms of this Agreement on or before October
31, 1998 that Purchaser intends to close one or two of the Company Owned
Stores, Seller will pay or reimburse Purchaser for up to a maximum of 60% of
the costs and expenses, including attorneys fees, associated with terminating
the lease agreement(s) for the Company Owned Store(s) which is/are closing.
Seller's payment will apply only to the costs of terminating the lease
agreements and not to any other costs or expenses of terminating Company
Owned Store operations, and it shall apply to no more than two of the Company
Owned Stores, regardless of how many Company Owned Stores are closed.
4. PURCHASER'S AND GRUESERS' REPRESENTATIONS AND WARRANTIES
Purchaser and Gruesers hereby represent and warrant that the following
are true and correct as of the date hereof and will be true and correct
through the Closing Date as if made on that date.
a. CORPORATE STATUS. Purchaser is duly organized, validly
existing and in good standing under the laws of the state in which it is
organized, with all requisite power and authority to carry on its respective
businesses in which it is engaged, to own the respective properties it owns,
and is duly qualified and licensed to do business and is in good standing in
all jurisdictions where the nature of its business makes such qualifications
necessary.
b. AUTHORIZATION AND VALIDITY. The execution, delivery and
performance by Purchaser of this Agreement and any other agreements
contemplated hereby, and the consummation of the transactions contemplated
hereby and thereby, have been duly authorized by all requisite corporate
action of Purchaser. This Agreement and any other agreement contemplated
hereby have been or will be as of the Closing Date, duly executed and
delivered by Purchaser and Gruesers and constitutes and will constitute
legal, valid and binding obligations of Purchaser and Gruesers and is
enforceable against them in accordance with their respective terms.
c. CONSENTS; APPROVALS, CONFLICTS. No consent, approval,
authorization or order of any court or governmental agency or other body is
required for Purchaser or Gruesers to execute and perform their obligations
under this Agreement. Neither the
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execution, delivery, consummation or performance of this Agreement shall
conflict with or constitute a breach of, and no prior approval is necessary
by or under, Purchaser's organizational documents or the articles of
incorporation or bylaws, as amended to date, or any note, mortgage,
indenture, deed of trust, lease, obligation or other agreement or instrument
to which Purchaser or Gruesers are a party or by which any of them is bound
nor, to the best of Purchaser's and Grueser's knowledge and belief, any
existing law, rule, regulation, or any decree of any court or government
department, agency, commission, board or bureau, domestic or foreign, having
jurisdiction over Purchaser or Gruesers. Neither Gruesers nor Purchaser is
required to give any notice to, or make any filing with, or obtain any
authorization, consent or approval of any government agency in order for the
Parties to consummate the transactions contemplated by this Agreement.
d. LITIGATION. There are no claims, actions, suits, proceedings, or
investigations pending or threatened against or affecting the Exchanged Assets
or the Grueser's Stores in any court or by or before any federal, state,
municipal or other governmental department, commission, board, bureau, agency or
other instrumentality, domestic or foreign, or arbitration tribunal or other
forum which, if determined adversely to Gruesers and/or Purchaser would
materially affect Seller's ability to operate the Grueser's Stores immediately
after Closing as they are now being operated. There are no judgments, decrees,
injunctions, writs, orders or other mandates outstanding which would materially
affect Seller's ability to operate the Grueser's Stores immediately after the
Closing.
e. ESTOPPEL. All statements made by Gruesers and Purchaser in this
Agreement, or in any Exhibit or Schedule hereto, or in any document or
certificate required to be executed and delivered under this Agreement, are
true, correct and complete to the best of their knowledge as of the date of this
Agreement and will be so as of the Closing Date.
f. COMPLIANCE WITH LAWS AND PERMITS. To the best of their
knowledge, Gruesers and Purchaser have complied in all material respects with
all laws, regulations and rules, orders, judgments, writs, decrees or
injunctions of federal, state and municipal governments or any department,
agency or other instrumentality thereof, applicable to the Grueser's Stores and
have not done or omitted to do any act or acts which are in violation of
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any of the foregoing. Gruesers and Purchaser have obtained all federal,
state and municipal licenses and permits necessary to operate the Grueser's
Stores, are not in violation of any such license or permit and have not
received any notification that any revocation or limitation thereof is
pending or threatened, except where the failure to obtain the same, or
violation, revocation, or limitation thereof, would not have a materially
adverse effect on the Grueser's Stores.
g. LEASES AND CONTRACTS. Neither Purchaser nor Gruesers are the
owner, lessor or sublessor with respect to the premises of any of the Grueser's
Stores. All leases for the premises of the Grueser's Stores are valid and
binding agreements of Gruesers and/or Purchaser, there is no material breach or
violation of or default under any provision of any such lease, and no fact or
event has occurred which would materially affect Grueser's or Purchaser's
interest in or under any such lease. Gruesers and/or Purchaser own good and
merchantable title to all such leasehold interests free and clear of all
material mortgages, liens, pledges, restrictions, charges or encumbrances of any
nature. Neither Purchaser nor Gruesers have any other leasehold interests in
real or personal property or contract rights which are material to the operation
of the Exchanged Assets. Seller shall be responsible for a maximum of $500 per
lease for costs associated with assigning said leases to Seller and Purchaser
shall pay all costs over and above $500 related to said lease assignments.
h. TRADEMARKS AND COPYRIGHTS. Attached to this Agreement as
SCHEDULE 4.h is a description of all registered trademarks, service marks,
copyrights, trade names and licenses and applications pending therefor, if any,
which are used in the operation of the Grueser's Stores which are not licensed
by Seller to Gruesers under the terms of the franchise agreements governing the
Grueser's Stores. Assignments for each such registered trademark and service
mark and copies of all other rights or applications shall be furnished to Seller
on the Closing Date.
i. AUTHORIZATION AND VALIDITY. The execution, delivery and
performance by Purchaser and Gruesers of this Agreement and any other agreements
contemplated hereby, and the consummation of the transactions contemplated
hereby and thereby, have been duly authorized by Purchaser's Board of Directors
and its shareholders, if required by law or
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Purchaser's bylaws. This Agreement and all other agreements contemplated
hereby have been or will be as of the Closing Date duly executed and
delivered by Purchaser and Gruesers and constitute and will constitute legal,
valid and binding obligations of Purchaser and Gruesers, enforceable against
them in accordance with their respective terms, except as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws affecting creditors' rights generally and by general
principles of equity that may limit availability of certain equitable
remedies in certain instances.
j. RESTRICTIVE COVENANTS. Prior to the consummation of the proposed
transactions, Gruesers and Purchaser shall operate the Grueser's Stores and use
the Exchanged Assets in the ordinary and usual course without unusual
commitments and in compliance with all applicable laws, rules and regulations.
k. CONSENTS; APPROVALS; CONFLICT. No consent, approval,
authorization or order of any court or governmental agency or other body is
required for Gruesers or Purchaser to consummate the exchange of the Exchanged
Assets. Neither the execution, delivery or performance of this Agreement shall
conflict with, or constitute a breach of, and no prior approval is necessary by
or under, Purchaser's articles of incorporation or bylaws, as amended to date,
or any note, mortgage, indenture, deed of trust, lease, obligation, or other
agreement or instrument to which Purchaser or Gruesers are a party or by which
they are bound nor, to the best of Gruesers and Purchaser's knowledge, any
existing law, rule, regulation, or any decree of any court or governmental
department, agency, commission, board or bureau, having jurisdiction over the
Exchanged Assets. To the best of Grueser's and Purchaser's knowledge, they are
not required to give any notice to, or make any filing with, or obtain any
authorization, consent or approval of, any government or governmental agency in
order for the Parties to consummate the transactions contemplated by this
Agreement.
l. ASSETS SOLD "AS-IS". To the best of Grueser's and Purchaser's
knowledge, the inventories, supplies, equipment and other items which constitute
the Exchanged Assets are usable in the ordinary course of business. The Parties
acknowledge and agree that the Exchanged Assets are being sold "as-is, where-is"
with no warranties or guaranties except that Gruesers and Purchaser shall
warrant that the Exchanged Assets will be
18
<PAGE>
in good operating condition on the Closing Date. EXCEPT AS EXPRESSLY SET
FORTH HEREIN, GRUESERS AND PURCHASER MAKE NO REPRESENTATIONS OR WARRANTIES
(EXPRESS OR IMPLIED) AS TO THE CONDITION, REPAIR, QUANTITIES, SALEABILITY,
MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY OF THE EXCHANGED
ASSETS.
m. TITLE TO ASSETS. Gruesers and/or Purchaser shall have on the
Closing Date, good and marketable title to all of the Exchanged Assets and said
Exchanged Assets shall not be subject to any material mortgage, lien, pledge,
lease, security interest or encumbrance, except as disclosed to Seller.
n. PAYMENT OF TAXES. All Taxes of the Gruesers and/or Purchaser
relating to the Grueser's Stores and the Exchanged Assets relating to periods or
portions thereof ending on or before the Closing Date, have been paid, or will
have been paid, or an adequate reserve established therefor in conformity with
generally accepted accounting principles consistently applied, and neither
Purchaser nor Gruesers have any liability for Taxes in excess of the amounts so
paid or reserves so established. All Taxes that Gruesers and/or Purchaser have
been required to collect or withhold have been duly collected or withheld and,
to the extent required when due, have been or will be duly paid to the proper
taxing authority.
o. MISCELLANEOUS. The execution and performance of this Agreement
and compliance with the provisions hereof will not violate, with or without
giving notice and/or the passage of time, any provisions of law applicable to
Seller. There are no pending or threatened litigations, actions or claims which
do or might threaten Seller's ability to perform its obligations under this
Agreement. All statements made by Seller in this Agreement, or in any Exhibit
or Schedule hereto, or in any document or certificate executed and delivered
herewith, are true, correct and complete as of the date of this Agreement and
will be so as of the Closing Date. All copies of documents provided and to be
provided by Seller are and shall be true and correct copies of such documents.
p. NO OTHER REPRESENTATIONS OR WARRANTIES. Seller acknowledges that
it has done its own due diligence investigation of the Grueser's and Purchaser's
records related to the Exchanged Assets and, based on this investigation, is
satisfied that all pertinent
19
<PAGE>
information and records have been made available to it. Seller acknowledges
that in determining to enter into this Agreement it has relied only on this
investigation and the representations, warranties, and information contained
in this Agreement and Schedules and Exhibits attached to this Agreement.
Other than the representations and warranties contained in this Agreement and
in the franchise agreements between the Gruesers and Seller and in the
Schedules and Exhibits attached to this Agreement, no other warranties are,
or have been, made to or are relied upon by Seller in entering into this
Agreement.
5. CONDITIONS TO OBLIGATIONS OF THE PARTIES; DELIVERIES
All obligations of the Parties under this Agreement are subject to the
fulfillment, prior to the Closing Date, of all conditions precedent and to
performance of all covenants and agreements and completion of all deliveries
contemplated herein, unless specifically waived in writing by the Parties
entitled to performance of the covenant or delivery of the documents.
Purchaser's obligations to purchase and pay for the Purchased Assets are further
subject to the representations and warranties of Seller being true and correct
in all material respects on the Closing Date, and the obligation of Seller to
sell, transfer, assign, convey and deliver the Purchased Assets is further
subject to the representations and warranties of Purchaser being true and
correct in all material respects on the Closing Date. Conversely, Seller's
obligations to accept the Exchanged Assets are further subject to the
representations and warranties of Gruesers and Purchaser being true and correct
in all material respects on the Closing Date, and the obligation of Gruesers and
Purchaser to transfer, assign, convey and deliver the Exchanged Assets is
further subject to the representations and warranties of the Seller being true
and correct in all material respects on the Closing Date.
a. PERFORMANCE OF COVENANTS AND CONDITIONS. Seller shall have
performed, satisfied and complied with all covenants, agreements and conditions
required by this Agreement to be performed or complied with or satisfied by
Seller on or before the Closing Date. Purchaser and Gruesers shall each have
performed, satisfied and complied with all covenants, agreements and conditions
required by this Agreement to be performed or complied with or satisfied by one
or both of them on or before the Closing Date.
20
<PAGE>
b. ABSENCE OF CERTAIN CHANGES. Prior to the Closing Date, there
shall not have been:
i. Any material adverse change in the Purchased Assets or
the business conducted by Seller or occurrence of any event which materially
adversely affects the Fuzziwig's System;
ii. Any damage, destruction or loss, whether or not covered
by insurance, materially and adversely affecting the Purchased Assets;
iii. Any material mortgage, pledge or subjection to lien of
any of the Purchased Assets;
iv. Any sale or transfer of any of the Purchased Assets,
except in the ordinary course of business;
v. No action, suit or proceeding before any court or any
governmental body or authority pertaining to the transactions contemplated in
this Agreement or its consummation or materially affecting the business or
Purchased Assets shall have been instituted or threatened on or before the
Closing Date;
vi. Any material adverse change in the Exchanged Assets or
the business conducted by Gruesers and Purchaser or occurrence of any event
which materially adversely affects the Grueser's Stores;
vii. Any damage, destruction or loss, whether or not covered
by insurance, materially and adversely affecting the Exchanged Assets;
viii. Any material mortgage, pledge or subjection to lien of
any of the Exchanged Assets;
ix. Any sale or transfer of any of the Exchanged Assets,
except in the ordinary course of business; and
x. No action, suit or proceeding before any court or any
governmental body or authority pertaining to the transactions contemplated in
this Agreement or its consummation or materially affecting the Grueser's Stores
or Exchanged Assets shall have been instituted or threatened on or before the
Closing Date.
21
<PAGE>
c. CERTIFICATES OF RELEASE. Purchaser shall have received from
Seller appropriate certificates of release or clearance, as may reasonably be
requested by Purchaser, indicating that Seller is not obligated for the payment
of any tax or fee due to any governmental agency. Seller shall have received
from Gruesers and/or Purchaser, appropriate certificates of release or
clearance, as may reasonably be requested by Seller, indicating that Gruesers
and Purchaser are not obligated for the payment of any tax or fee due to any
governmental agency.
6. DELIVERIES
6.2. DELIVERIES TO PURCHASER. At the Closing, the following documents
shall be delivered to Purchaser by Seller:
i. A certificate executed by an authorized officer of
Seller, dated the Closing Date, certifying that Seller's representations and
warranties in this Agreement and information in the attached Schedules and
Exhibits are then true and correct in all material respects to the best of his
or her knowledge and belief and that Seller has complied with all agreements
and conditions required by this Agreement and all related agreements to be
performed or complied with by it;
ii. Fully executed originals of the Noncompetition Agreement
among the Parties and assignments, in appropriate form, for all Marks, properly
executed and acknowledged;
iii. All Schedules and Exhibits which relate to the Purchased
Assets, properly filled out (if a Schedule or Exhibit does not apply, it should
nonetheless be attached and marked "not applicable");
iv. Any consents and/or assignments of leases related to the
Company Owned Stores which are available as of the Closing Date;
v. Any assignments of contracts related to the Company Owned
Stores which are available as of the Closing Date;
vi. Assignments of the two Franchise Agreements which relate
to the Franchised Stores;
22
<PAGE>
vii. Bill of Sale, Assumption and Assignment in the form
attached hereto as EXHIBIT VII; and
viii. Certificates of Release.
6.2. DELIVERIES TO SELLER. At the Closing, the following documents shall
be delivered to Seller by Purchaser:
i. the Purchase Price;
ii. a certificate executed by an authorized officer of
Purchaser dated the Closing Date, certifying that the representations and
warranties of Purchaser contained in this Agreement and information in the
attached Schedules and Exhibits are then true and correct in all material
respects to the best of his or her knowledge and belief and that Purchaser has
complied with all agreements and conditions required by this Agreement and all
related agreements to be performed or complied with by it;
iii. fully executed assignments, in appropriate form, for any
trade names, telephone numbers, telephone directory listings, and any other
trade marks or service marks used in the operation of the Grueser's Stores,
properly executed and acknowledged;
iv. all Schedules and Exhibits which relate to the Exchanged
Assets, properly filled out (if a Schedule or Exhibit does not apply, it should
nonetheless be attached and marked "not applicable");
v. any consents and/or assignments of leases related to the
Grueser's Stores which are available as of the Closing Date;
vi. any assignments of contracts related to the Grueser's
Stores which are available as of the Closing Date;
vii. Bill of Sale, Assumption and Assignment; and
viii. Certificates of Release.
7. COVENANTS
7.1 EXECUTION OF THIS AGREEMENT. The Parties hereto each will use its
best efforts to cause this Agreement and all related agreements to become
effective, and all transactions herein and therein contemplated to be
consummated, in accordance with its, and their terms, to obtain all required
consents, waivers and authorizations of governmental entities and other
23
<PAGE>
third parties, to make all filings and give all notices to those regulatory
authorities or other third parties which may be necessary or reasonably
required in order to effect the transactions contemplated in this Agreement,
and to comply with all federal, local and state laws, rules and regulations
as may be applicable to the contemplated transactions.
7.2 COVENANTS OF THE GRUESERS. The Gruesers shall sell or otherwise
divest, in accordance with the terms of their respective franchise agreements
with Seller, all of the Gruesers' right, title and interest in and to the two
ROCKY MOUNTAIN CHOCOLATE FACTORY Stores owned by the Gruesers which are not part
of the Exchanged Assets, no later than 18 months after the Closing Date,
provided, however, that Gruesers may sell these two Stores to their children if
they comply with the transfer provisions in the franchise agreements governing
these Stores. All post-termination covenants, duties and obligations of the
Gruesers set forth in the franchise agreements governing these two Stores shall
apply to the Gruesers except to the extent enforcement thereof is waived by
Seller in this Agreement and in addition, the noncompetition agreement among all
of the Parties hereto shall apply to the Gruesers and all other Parties to this
Agreement. So long as the Gruesers and Purchaser are in compliance with the
terms of this Agreement and related agreements, Seller waives its rights to
enforce the Grueser's post-termination covenants in its franchise agreements
with the Gruesers to the extent that the Gruesers will be allowed to own and
operate the Company Owned Stores and the Franchised Stores and the Purchased
Assets and do and perform all other acts contemplated in this Agreement.
8. TERMINATION.
8.1 GROUNDS FOR TERMINATION. This Agreement shall terminate:
i. By mutual written consent of Purchaser, RC and Seller at
any time prior to the Closing; or
ii. By written notice from any Party to the other Parties if
all the conditions precedent to its respective obligations hereunder have not
been satisfied or waived prior to the Closing Date; or
24
<PAGE>
iii. By written notice from the terminating Party to all other
Parties if, prior to the Closing Date, any Party is in breach of any material
representation, warranty or covenant contained in this Agreement in any material
respect.
8.2 EFFECT OF TERMINATION. If any Party terminates this Agreement
pursuant to Section 8.1 above, all obligations of the Parties remaining
hereunder shall terminate without any liability of any Party to any other Party,
except for any liability of any Party then in breach. Upon termination of this
Agreement for any reason, (i) the covenants of the Parties concerning the
confidentiality and proprietary nature of all documents and other information
furnished hereunder shall remain in force except as to information which has
otherwise become public knowledge, and (ii) each Party shall promptly return all
documents received from any other Party in connection with this Agreement and
all copies thereof. This Section constitutes a covenant of the Parties, and any
Party may judicially enforce it.
9. MISCELLANEOUS PROVISIONS
a. AMENDMENTS. This Agreement shall be amended, modified, or
supplemented only by an instrument in writing executed by the Parties.
b. ASSIGNMENT. This Agreement and any right or obligation created
hereby or in any agreement entered into in connection with the transactions
contemplated hereby, shall not be assignable by any Party hereto without the
consent of all Parties not seeking the assignment. No such assignment shall
relieve the assignor of any obligations created by this Agreement.
c. PARTIES IN INTEREST; NO THIRD PARTY BENEFICIARIES. Except as
otherwise provided herein, the terms and conditions of this Agreement shall
inure to the benefit of and be binding upon the Parties and their respective
heirs, legal representatives, successors and assigns. Neither this Agreement nor
any other agreement contemplated hereby shall be deemed to confer upon any
person not a party hereto or thereto any rights or remedies hereunder or
thereunder.
d. ENTIRE AGREEMENT. This Agreement, including the Exhibits and
Schedules hereto, and the agreements contemplated hereby constitute the entire
agreement of the Parties regarding the subject matter hereof, and supersede all
prior agreements and
25
<PAGE>
understandings, both written and oral, among the Parties, or any of them,
with respect to the subject matter hereof.
e. SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws effective during
the term hereof, such provision shall be fully severable and this Agreement
shall be construed and enforced as if such illegal, invalid or unenforceable
provision never comprised a part hereof; and the remaining provisions hereof
shall remain in full force and effect and shall not be affected by the illegal,
invalid or unenforceable provision or by its severance herefrom. Further, in
lieu of such illegal, invalid or unenforceable provision, there shall be added
automatically as part of this Agreement a provision, as similar in terms to such
illegal, invalid, or unenforceable provision as may be possible and be legal,
valid and enforceable.
f. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. The
representations, warranties and covenants contained herein shall survive the
Closing and all statements contained in any certificate, schedule, exhibit or
other instrument delivered by or on behalf of the Purchaser, Gruesers or Seller,
and, notwithstanding any provision in this Agreement to the contrary, shall
survive the Closing, for a period of 18 months, except for representations and
warranties relating to taxes, which shall survive for the period of any
applicable statutes of limitation.
g. GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of Colorado. If any action is brought to enforce or
interpret any term of this Agreement, venue shall be in the City and County of
Denver, Colorado.
h. CAPTIONS. The captions in this Agreement are for convenience of
reference only and shall not limit or otherwise affect any of the terms or
provisions hereof.
i. GENDER AND NUMBER, ETC.. Whenever the context requires, the
gender of all words used herein shall include the masculine, feminine and
neuter, and the number of all words shall include the singular and plural. Use
of the words "herein," "hereof," "hereto" and the like in this Agreement shall
be construed as references to this Agreement as a whole and not to any
particular Article, Section or provision of this Agreement, unless otherwise
noted.
26
<PAGE>
j. CONFIDENTIALITY. Each Party shall keep this Agreement and its
terms and all documents delivered in connection with this Agreement
confidential, and shall make no press release, private or public disclosure,
either written or oral, regarding the transactions contemplated by this
Agreement without the prior knowledge and consent of the other parties hereto;
provided that the foregoing shall not prohibit any disclosure (i) by press
release, filing or otherwise that is required by federal securities laws, or
rules governing issuers of stock listed on the NASDAQ system and (ii) to
attorneys, accountants, investment bankers or other agents of the Parties
assisting the Parties in connection with the transactions contemplated by this
Agreement. In the event that the transactions contemplated hereby are not
consummated for any reason whatsoever, the Parties hereto agree not to disclose
or use any confidential information they may have concerning the affairs of the
other Parties, except for information that is required by law to be disclosed.
k. NOTICE. Any notice or communication hereunder or in any
agreement entered into in connection with the transactions contemplated hereby
must be in writing and given by depositing the same in the United States mail,
addressed to the Parties to be notified, postage prepaid and certified with
return receipt requested, by facsimile transmission or by delivery by use of a
messenger which regularly retains its delivery receipts. Such notice shall be
deemed received on the date on which it is delivered to the addressee. For
purposes of notice, the addresses of the Parties shall be:
IF TO SELLER: Rocky Mountain Chocolate Factory, Inc.
265 Turner Drive
Durango, CO 81301
Attn: C. Wade Folsom,
Executive Vice President
Fax: (970) 259-5895
WITH A COPY TO: Lynne M. Hanson, Esq.
Smith McCullough, P.C.
4643 South Ulster Street, Suite 900
Denver, Colorado 80237
Fax: (303) 221-6001
27
<PAGE>
IF TO PURCHASER: Resort Confections, Inc.
c/o William Don and Patricia C. Grueser
P. O. Box 882829
Steamboat Springs, Colorado 80488
Fax: (970) 870-8618
l. NO FINDERS. Each Party represents and warrants to the others and
agrees that it has not employed or engaged, and will not employ or engage, any
person as a finder or broker in connection with the transactions contemplated
herein, and that no person is entitled to compensation as a finder or broker.
Each Party hereby indemnifies the other Parties and holds the other Parties
harmless from and against any claims of any third persons claiming to have acted
as a finder or broker in connection with the transactions herein contemplated,
and such indemnity shall include all expenses, costs and damages arising from or
related to such claims, including reasonable attorneys' fees.
m. EXPENSES. Except as otherwise provided in this Agreement, the
Parties shall each bear their own fees and expenses incurred in connection with
the transactions contemplated in this Agreement.
n. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument. Execution and delivery of
this Agreement by exchange of facsimile copies bearing facsimile signatures of a
party shall constitute a valid and binding execution and delivery of this
Agreement by such Party and shall be enforceable as original documents.
o. PREVAILING PARTY CLAUSE. In the event of any litigation or
proceeding arising as a result of the breach of this Agreement or the failure to
perform hereunder, or failure or untruthfulness of any representation or
warranty herein, the Party or Parties prevailing in such litigation or
proceeding shall be entitled to collect the costs and expenses of bringing or
defending such litigation or proceeding, including reasonable attorney's fees,
from the Party or Parties not prevailing.
28
<PAGE>
p. CONSTRUCTION. The language used in this Agreement will be deemed
to be the language chosen by the Parties to express their mutual intent, and no
rule of strict construction will be applied against any Party. The Parties
intend that each representation, warranty and covenant contained herein shall
have independent significance. If any Party has breached any representation,
warranty or covenant contained herein in any respect, the fact that there exists
another representation, warranty or covenant relating to the same subject matter
(regardless of the relative levels of specificity) which the Party has not
breached shall not detract from or mitigate the fact that the Party is in breach
of the first representation, warranty or covenant.
q. INCORPORATION OF EXHIBITS AND SCHEDULES. The Exhibits and
Schedules identified in this Agreement are incorporated herein by reference and
made a part hereof.
r. SPECIFIC PERFORMANCE. Each of the Parties acknowledges and
agrees that the other Party will be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with specific terms
or otherwise breached. Accordingly, each of the Parties agrees that the other
Party shall be entitled to an injunction or injunctions to prevent breaches of
the provisions of this Agreement and to enforce specifically this Agreement and
the terms and provisions hereof in any manner instituted in any court of the
United States or any state thereof having jurisdiction over the Parties and the
matter in addition to any other remedy to which it may be entitled, at law or in
equity.
s. WAIVER OF BULK SALES COMPLIANCE. The Parties shall conduct the
sale and exchange of assets in compliance with any applicable state bulk sales
laws.
(Signatures on following page)
29
<PAGE>
(SIGNATURE PAGE TO PURCHASE AGREEMENT)
IN WITNESS WHEREOF, the Parties have executed this Asset Purchase Agreement
as of the date first set forth above.
ROCKY MOUNTAIN CHOCOLATE RESORT CONFECTIONS, INC.
FACTORY, INC.
By: By:
------------------------------- ----------------------------------
C. Wade Folsom, Executive Vice William Don Grueser, President
President
- --------------------------------- ---------------------------------
WILLIAM DON GRUESER, INDIVIDUALLY PATRICIA C. GRUESER, INDIVIDUALLY
30
<PAGE>
Exhibit 11.1
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. and SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
For Years Ended February 28 or 29,
1998 1997 1996
<S> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE
Income (loss) from continuing operations 1,260,001 ($1,365,702) $1,207,745
Income (loss) from discontinued operations (1,020,083) (355,991) 666
Net income (loss) 239,918 (1,365,702) $1,207,745
Weighted average number of
common shares outstanding 2,912,387 2,908,492 2,797,201
Dilutive effect of employee stock options 17,158 - 89,769
Weighted average common shares outstanding,
assuming dilution 2,929,545 2,908,492 2,886,970
BASIC EARNINGS (LOSS) PER COMMON SHARE
Continuing Operations $ .43 $ (.35) $ .43
Discontinued Operations (.35) (.12) -
Net Income $ .08 $ (.47) $ .43
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Continuing Operations $ .43 $ (.35) $ .42
Discontinued Operations (.35) (.12) -
Net Income $ .08 $ (.47) $ .42
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 24, 1998, accompanying the financial
statements included in the Annual Report of Rocky Mountain Chocolate Factory,
Inc. on Form 10-K for the year ended February 28, 1998. We hereby consent to
the incorporation by reference of said report in the Registration Statements
of Rocky Mountain Chocolate Factory, Inc. on Forms S-8 (File No. 33-79342,
effective May 25, 1994, File No. 33-62689, effective September 15, 1995, File
No. 33-63177, effective October 3, 1995, File No. 33-64651, effective
November 30, 1995, File No. 33-64653, effective November 30, 1995, and File
No. 333-8739, effective July 24, 1996).
GRANT THORNTON LLP
Dallas, Texas
June 10, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 1,795,381
<SECURITIES> 0
<RECEIVABLES> 2,388,770
<ALLOWANCES> 214,152
<INVENTORY> 2,567,966
<CURRENT-ASSETS> 7,426,135
<PP&E> 13,957,719
<DEPRECIATION> 4,285,276
<TOTAL-ASSETS> 19,867,892
<CURRENT-LIABILITIES> 3,476,887
<BONDS> 5,993,273
0
0
<COMMON> 87,373
<OTHER-SE> 9,932,087
<TOTAL-LIABILITY-AND-EQUITY> 19,867,892
<SALES> 20,659,076
<TOTAL-REVENUES> 23,763,982
<CGS> 10,960,966
<TOTAL-COSTS> 21,165,221
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 550,120
<INCOME-PRETAX> 2,048,641
<INCOME-TAX> 788,640
<INCOME-CONTINUING> 1,260,001
<DISCONTINUED> (1,020,083)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 239,918
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 792,606
<SECURITIES> 0
<RECEIVABLES> 1,698,711
<ALLOWANCES> 202,029
<INVENTORY> 2,082,566
<CURRENT-ASSETS> 5,737,626
<PP&E> 13,141,060
<DEPRECIATION> 3,400,719
<TOTAL-ASSETS> 18,666,130
<CURRENT-LIABILITIES> 3,073,851
<BONDS> 5,737,312
0
0
<COMMON> 87,369
<OTHER-SE> 9,691,573
<TOTAL-LIABILITY-AND-EQUITY> 18,666,130
<SALES> 19,682,622
<TOTAL-REVENUES> 22,280,607
<CGS> 11,017,119
<TOTAL-COSTS> 23,306,543
<OTHER-EXPENSES> 154,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 444,981
<INCOME-PRETAX> (1,625,217)
<INCOME-TAX> (615,506)
<INCOME-CONTINUING> (1,009,711)
<DISCONTINUED> (355,991)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,365,702)
<EPS-PRIMARY> (.47)
<EPS-DILUTED> (.47)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> FEB-29-1996
<CASH> 528,787
<SECURITIES> 0
<RECEIVABLES> 1,492,097
<ALLOWANCES> 28,196
<INVENTORY> 2,460,586
<CURRENT-ASSETS> 4,780,816
<PP&E> 12,318,792
<DEPRECIATION> 2,446,047
<TOTAL-ASSETS> 16,307,601
<CURRENT-LIABILITIES> 2,737,673
<BONDS> 2,183,877
0
0
<COMMON> 87,155
<OTHER-SE> 11,030,227
<TOTAL-LIABILITY-AND-EQUITY> 16,307,601
<SALES> 15,903,838
<TOTAL-REVENUES> 18,552,141
<CGS> 8,723,011
<TOTAL-COSTS> 16,394,780
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 242,172
<INCOME-PRETAX> 1,915,189
<INCOME-TAX> 708,110
<INCOME-CONTINUING> 1,207,079
<DISCONTINUED> 666
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,207,745
<EPS-PRIMARY> .43
<EPS-DILUTED> .42
</TABLE>
